Newly Adopted Capital Rules – Are You Ready?
Newly Adopted Capital Rules – Are You Ready?
Is your bank’s capital umbrella strong enough to weather potential financial storms? The FDIC wants to ensure your umbrella is not only strong enough, but is also ready. The FDIC’s recently adopted new capital rule, 12 CFR 324, serves as an interim final rule aiming to strengthen the quality of regulatory capital while enhancing banks’ ability to weather times of financial stress. Working in conjunction with final capital rules issued by the Federal Reserve Board and the OCC, the FDIC’s rule became effective January 1, 2015, with certain components being phased in over time. While the rule was designed to ensure the strength of all banks, which changes most strongly impact community banks?
The most significant changes to the regulatory capital framework enacted by the rule affect community banks in the following ways:
- Revises regulatory capital definitions and minimum ratios – The rule created a new common equity Tier 1 capital ratio and increased the minimum Tier 1 capital ratio. The Tier 1 capital ratio is now calculated using the common equity Tier 1 capital ratio and the additional Tier 1 capital ratio.
- Implements a capital conservation buffer – Capital conservation buffers are designed to provide a bank with resilience during periods of financial stress, enabling operational continuity and ongoing lending opportunities. Under the FDIC’s final interim rule, the buffer limits a bank’s ability to pay dividends or discretionary bonuses in a calendar quarter if the bank’s risk-based capital ratios fall below designated minimum thresholds.
- Revises Prompt Corrective Action (PCA) thresholds and adds the new ratio to PCA framework – Although the rule maintains the general structure of current PCA framework, some PCA capital thresholds have increased. Additionally, common equity Tier 1 capital ratio is identified as a new threshold.
- Changes risk weighting for certain asset categories and off-balance sheet exposures – Notably, the FDIC recognized the importance of 1-4 family residential mortgages risk weights for community banks and, as a result, the new rule does not change risk-weighting for this asset from the former rule. The rule does change risk-weighting for on-balance sheet, off-balance sheet, and substitution items, as applicable to your bank.
While the FDIC identifies the changes listed above as the most significant changes for community banks, your bank may be subject to other changes implemented by the final interim capital rule. As with any new or revised rules designed for “all” banks, community banks may be more strongly impacted financially and operationally than larger banks. To help you ready your capital and compliance umbrellas, and navigate the changes accompanying the final interim capital rule, the FDIC offers multiple useful resources, including the “Expanded Community Bank Guide to the New Capital Rule for FDIC-Supervised Banks,” at https://www.fdic.gov/regulations/capital/.
For additional information contact the author Julie J. Mixtacki at jmixtacki@fosaudit.com.
Julie J. Mixtacki | Newly Adopted Capital Rules – Are You Ready?