Basel III Capital Rule Impact and Reporting. Nancy Fitzgerald Lead Risk Specialist Federal Reserve Bank of Kansas City

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1 Basel III Capital Rule Impact and Reporting Nancy Fitzgerald Lead Risk Specialist Federal Reserve Bank of Kansas City

2 Disclaimer The opinions expressed are those of the presenter and are not those of the Federal Reserve Bank of Kansas City, the Federal Reserve System, or its Board of Governors. Applicability of New Capital Rules Banking organizations that include: National banks State member and nonmember banks Savings associations Holding companies include: Top-tier bank holding companies (BHCs) with consolidated assets greater than $500 million Top-tier savings and loan holding companies (SLHCs) New Basel III rules do not currently apply to SLHCs substantially engaged in insurance underwriting or commercial activities

3 Important Dates January 1, 2015: Effective date of the new rule for community banking organizations Form & Regulatory Capital Schedule First Reporting Date Filers FFIEC Call Report/RC-R March 31, 2015 Banks, Savings Associations FR Y-9C/HC-R March 31, 2015 Top-tier BHCs & SLHCs $500 million in consolidated assets, exception for insurance SLHCs FR Y-9SP/SC-R June 30, 2015 Top-tier SLHCs less than $500 million in consolidated asset, exception for insurance SLHCs Regulatory Capital Schedules FFIEC RC-R & FR Y-9C HC-R Part 1.B: The components of capital, adjustments and deductions Recently approved and implemented for the largest banks in 2014 Will replace the existing Part 1.A. in 2015 FR Y-9SP SC-R Part 1: Recently approved Will be implemented in 2015 FFIEC RC-R & FR Y-9C HC-R & FR Y-9SP SC-R Part II: Risk-weighted assets June 27 th FFIEC teleconference on proposed reporting changes HC-R & SC-R comment period closed October 6 th Will be implemented in 2015

4 AOCI Opt-Out Election Regulatory capital schedule for first reporting date contains the accumulated other comprehensive income (AOCI) opt-out election Opt-Out means most components of AOCI will not affect regulatory capital Enter 1 for yes to opt-out; enter 0 for no Largest banks must enter 0 for no Transition provisions for institutions that do not opt-out AOCI Opt-Out Election (Cont d) Components of AOCI that will not affect regulatory capital if you opt-out, but must be reported (items 9.a through 9.e) in the regulatory capital schedule: a. Unrealized gains/losses on available-for-sale (AFS) securities b.unrealized losses on AFS preferred stock c. Accumulated net gains/losses on cash flow hedges d.gains/losses attributed to postretirement plans e. Unrealized gains/losses on held-to-maturity securities

5 Changes to Capital: The Numerator Common equity tier 1 capital (CET1): New sub-component of tier 1 regulatory capital Adjustments & deductions are made to CET1 New risk-based ratio incorporates CET1 CET1 must be the predominant form of total capital Changes to Capital: The Numerator (Cont d) Deferred Tax Assets (DTAs) Current Rules: Tier 1 limit on DTAs dependent on future taxable income The lesser of: i. The amount of DTAs the bank expects to realize in one year ii.10 percent of the bank s tier 1 capital Amounts over this limit are deducted from tier 1 capital

6 Changes to Capital: The Numerator (Cont d) DTAs New Rules Threshold Deductions Deduct from CET1: DTAs that arise from net operating losses (NOLs) and tax credit carryforwards DTAs that arise from temporary differences that cannot be realized through NOL carrybacks and that exceed 10 percent of CET1 Starting in 2018 the amount of such DTAs not deducted from CET1 has a risk weight of 250 percent Changes to Capital: The Numerator (Cont d) Mortgage Servicing Assets (MSAs) Current Rules: MSAs cannot exceed 100 percent of tier 1 capital Fair value limitation: the lesser of 90 percent of fair value and 100 percent of book value may be included in capital Disallowed amount is deducted from tier 1

7 Changes to Capital: The Numerator (Cont d) MSAs New Rules Threshold Deductions Deduct from CET1: MSAs that exceed 10 percent of CET1 Starting in 2018 the amount of MSAs not deducted from CET1 has a risk weight of 250 percent Changes to Capital: The Numerator Threshold Deductions MSAs < 10% CET1 DTAs < 10% CET1 Other < 10% CET1 Sum of MSAs + DTAs + Significant investments in common stock of unconsolidated financial institutions cannot exceed 15 percent of CET1 after other deductions

8 Summary of CET1 Calculation Common Stock + Retained Earnings ± AOCI - Deductions Goodwill DTAs (NOL) Other Intangibles - Threshold Deductions MSAs > 10% CET1 DTAs > 10% CET1 Third Threshold item > 10% CET1 Aggregate Threshold Deductions > 15% CET1 = Common Equity Tier 1 Changes to Risk-Weighted Assets: The Denominator Securitizations New Rules How is the risk-weighting of securitizations changing? What is a securitization? Tranching of credit risk On- and off-balance sheet exposures Underlying exposures are financial Includes the FHLB Mortgage Partnership see preamble

9 Changes to Risk-Weighted Assets: The Denominator (Cont d) Securitizations: (c) Due diligence requirements: Must demonstrate understanding of the exposure to the regulator s satisfaction Pre-purchase analysis within three days: Securitizations structure, e.g., cash flow waterfall, triggers and servicer performance Data on underlying assets, e.g., past due and default rates, borrower characteristics, loan attributes, pool diversification Market data that affects the value of the securitization On-going analysis at least quarterly Otherwise regulator can require risk weight of 1,250 percent Changes to Risk-Weighted Assets: The Denominator (Cont d) Securitizations Three Risk Weight Approaches: 1. Gross-up approach 2. Simplified Supervisory Formula Approach (SSFA) 3. 1,250 percent Minimum risk weight for gross-up and SSFA is 20 percent Must use the same approach for all securitizations

10 Capital Ratios Ratios (Column A) 2013 Current Rules Minimum Requirements = PCA Adequately Capitalized (Column B) 2013 Current Rules PCA Well Capitalized (Column C) 2015 New Rules Minimum Requirements = PCA Adequately Capitalized (Column D) 2015 New Rules PCA Well Capitalized (Column E) 2019 New Rules Minimum Requirements + 2.5% Capital Conservation Buffer (Column F) Leverage Ratio 3% / 4% 5.0% 4.0% 5.0% N/A Minimum CET1 Capital N/A N/A 4.5% 6.5% 7.0% Minimum Tier 1 Capital 4.0% 6.0% 6.0% 8.0% 8.5% Minimum Total Capital 8.0% 10.0% 8.0% 10.0% 10.5% Transition Dates Transition Schedule for New Ratios and Capital Definitions (shading indicates transition periods - all dates are as of January 1) Ratios Leverage Ratio 4.00% 4.00% 4.00% 4.00% 4.00% Minimum Common Equity Tier 1 Capital Ratio 4.50% 4.50% 4.50% 4.50% 4.50% Capital Conservation Buffer (composed of CET1) 0.625% 1.250% 1.875% 2.50% Minimum CET1 + Capital Conservation Buffer 4.50% 5.125% 5.75% 6.375% 7.00% Phase-in of most deductions from CET1 40% 60% 80% 100% 100% Minimum Tier 1 Capital 6.00% 6.00% 6.00% 6.00% 6.00% Minimum Tier 1 Capital + Capital Conservation Buffer 6.00% 6.625% 7.25% 7.875% 8.50% Minimum Total Capital 8.00% 8.00% 8.00% 8.00% 8.00% Minimum Total Capital + Capital Conservation Buffer 8.00% 8.625% 9.25% 9.875% 10.50%

11 Example of a Capital Deduction Transition Transition Provisions for Items Subject to Threshold Deductions Transition Period Percentage of the deduction Calendar year Calendar year Calendar year Calendar year 2018 and thereafter 100 Additional Information Interagency New Capital Rule Community Bank Guide munity_bank_guide_ pdf Federal Reserve System Community Banking Connections FedLinks New Capital Rule for Community Banks FDIC Supervisory Insights, Winter 2013, The New Basel III Definition of Capital: Understanding the Deductions for Investments in Unconsolidated Financial Institutions n13/siwinter13.pdf

12 Additional Information (Cont d) FFIEC Reporting Forms Schedule RC-R Regulatory Capital final and proposed form and instructions Federal Reserve Information Collections under Review Bank Capital Estimation Tool Questions?