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Basel III - Impact to Community Banks

2013 AICPA National Conference on Banks and Savings Institutions

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Basel III has been a long time in coming . . . .

• July 2010: Dodd Frank Act passed into law

• December 2010: BCBS published original Basel III international rules

• August 12, 2012: U.S. Banking agencies published Basel III NPR in Federal Register

• Basel III NPR• Standardized Approach NPR• Advanced Approaches NPR

• July 2, 2013: FRB approved Basel III Final Rule

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Comments to the NPR were concentrated in 4 key areas . . .

The requirement to include most elements of AOCI in regulatory capital (e.g. +/- on AFS securities) - The final rule has an AOCI opt-out option

The new framework for risk weighting residential mortgages (Category 1 and Category 2)- The final rule eliminates the Category 1 & 2 that was introduced in the

NPR The requirement to phase out TruPS from T1 capital (3 year or 10 year

transition period based on total consolidated assets)- The final rule grandfathers if under $15 billion

The application of the rule to BHCs and SLHCs with substantial insurance and commercial activities- The final rule excludes these entities

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The Final Rule is much better for community banks . . .

Allows a one-time election to not include most elements of AOCI in regulatory capital

Does not adopt the proposed treatment of residential mortgages, and instead keeps the historical 50% and 100% risk weights

- 50%: 1-4 that are prudently underwritten and performing to original terms- 100%: all other, including junior liens (unless bank also holds 1st and there are no

intervening liens)

Permanently grandfathers non-qualifying capital instruments in the tier 1 capital of holding companies with consolidated assets under $15 billion

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The Final Rule also presents some challenges to Community Banks . . .

New Capital Ratio: Common Equity Tier 1 / Risk Weighted Assets at 4.5%

Change: Tier 1 / Risk Weighted Assets of 6%: previously 4%

New Capital Conservation Buffer equal to 2.5% RWA above minimum RBC requirements

NEW High Volatility CRE definition: Risk Weight at 150% vs. previously at 100%

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