ABA Recommends Changes to Agencies’ Regulatory Capital Simplification Proposal

The American Bankers Association today offered feedback to the federal banking agencies on a recent proposed rule that would simplify the complex Basel III regulatory capital calculations for all but the very largest banks. The proposal 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. ABA is supportive of the simplification process but argued that certain regulatory relief provisions should be available for all banks regardless of size.

Due to the iterative nature of the simplification process, and recognizing that current regulatory deductions are “unnecessarily punitive,” the association recommended that the simplification proposal be split into two separate rulemakings to allow the regulatory deductions portion of the proposal to be finalized as soon as possible.

That part of the proposal—which ABA supports—would loosen the treatment of the CET1 capital threshold deductions for mortgage servicing assets; temporary difference deferred tax assets not eligible for carryback; and investments in the capital of unconsolidated financial institutions. The proposed rule would raise the 10 percent deduction threshold for MSAs, DTAs, and TruPS investments to 25 percent.

ABA raised concerns that the agencies’ proposal to replace the complex definition of HVCRE exposures with a definition for high-volatility acquisition, development or construction loans — or HVADC — could increase regulatory capital costs and slow economic growth because it increases the scope of loans subject to a 130 percent risk weight. Among other suggested changes to this part of the proposal, ABA urged the agencies to exclude ADC loans not secured by real estate from the definition of HVADC and maintain the 15 percent contributed capital exemption criterion in the proposed HVADC definition, subject to certain modifications.

ABA also expressed support for developing a framework that would allow highly capitalized banks to be exempt from the Basel III regulatory capital requirements, noting that the Senate is currently considering an approach that would identify and exempt highly capitalized banks using a simple capital-to-assets ratio. ABA urged the agencies to explore a similar regulatory solution, adding that “we believe that this proposal would reduce regulatory burden for these banks by reducing staff time, outside audit costs, and even examination time at these highly capitalized banks.” For more information, contact ABA’s Hugh Carney or Barry Mills.