Agencies Finalize Pause on Certain Basel III Capital Provisions

The Federal Reserve, FDIC and OCC will tomorrow finalize a halt in the phase-in of certain Basel III capital rules for banks not using the Basel advanced approaches. Effective on Jan. 1, 2018, the rule pauses the full transition to the Basel III treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital of unconsolidated financial institutions and minority interests.

The pause comes as the agencies go through a larger rulemaking — long recommended by the American Bankers Association — that would simplify the treatment of assets subject to common equity tier 1 capital threshold deductions and limitations on minority interest and replace the definition of high-volatility commercial real estate exposures with a more straightforward measure.

Since advanced approaches are principally used by banking organizations with over $250 billion in assets or foreign bank subsidiaries with over $10 billion in assets, the pause applies broadly to community, midsize and even several regional banks. Comments are due on the broader simplification rule by Dec. 26, and ABA intends to file a letter.

In the final rule, the agencies responded to a concern raised by ABA and others about the effects on capital of implementing the current expected credit loss model. “The agencies recognize that CECL will affect accounting provisions and, consequently, retained earnings and regulatory capital, and that the amount of the effect will differ among banking organizations,” they said. While they did not take action now for lack of time, they added that “the agencies are considering separately whether or not it will be appropriate to make adjustments to the capital rules in response to CECL and its potential impact on regulatory capital.” For more information, contact ABA’s Hugh Carney or Barry Mills.