On September 24, the federal banking regulators, the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency (OCC) (the regulators) released a Basel III “calculator” intended to help estimate the impact of the proposed new capital rules on banks and bank holding companies. The regulators have stated the tool is intended to help institutions estimate the potential effect the proposals could have on capital ratios, “but should not be relied on as an indicator of a bank’s actual regulatory capital ratios.” In June 2012, the Federal Reserve Board, the FDIC and the OCC approved joint proposals for comment that would revise their current regulatory capital standards. The public comment period for these proposals ends on October 22. The Basel III notice of proposed rulemaking (NPR) focuses primarily on strengthening the level of regulatory capital requirements and improving the quality of capital by revising risk-based and leverage capital requirements consistent with agreements reached by the Basel Committee on Banking Supervision. The Standardized Approach NPR proposes a number of enhancements to the risk-sensitivity of the agencies’ capital standards, including revising rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses identified over recent years, incorporating aspects of the Basel II standardized framework, and alternatives to credit ratings, consistent with Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These revisions will impact methods for determining risk-weighted assets for residential mortgages, securitization exposures and counterparty credit risk. The NPR also would introduce disclosure requirements that would apply to US banking organizations with $50 billion or more in total assets.

According to the American Bankers Association,

the calculator is useful as a starting point for bankers to consider the effect of the proposed rules on their banks and customers, but ABA cautions against overreliance on its results. The tool offers only a point-in-time and high-level overview of the capital requirements, does not consider the increased volatility resulting from the proposals, and has gaps in its securitization treatment. The proposals’ actual impact is heavily dependent on technical new definitions, individual loan underwriting data, and changing market conditions.

The regulators themselves further cautioned that

the estimation tool is designed primarily for use by smaller, non-complex banking organizations that are not subject to the agencies’ market risk capital rule or the advanced approaches capital rule. It provides a general estimate of a banking organization’s leverage and risk-based capital ratios under the NPRs. Because the estimation tool was designed as a standardized mechanism for banking organizations to broadly understand the potential impact of the NPRs, it has certain inherent limitations and contains some simplifying assumptions to facilitate its widespread use. For example, the tool uses publicly available regulatory reporting data to limit the amount of additional information that banking organizations would need to prepare in order to develop an estimate. The tool also uses a 10-year period for phasing out non-qualifying capital instruments such as trust preferred securities. As a result of these and other assumptions that are described within the tool itself, a particular banking organization’s leverage and risk-based capital ratios under the NPRs may vary from the estimates produced using this tool.

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