Key Aspects of
the Proposed Rule on Advanced Capital Adequacy Framework--Basel II:
Establishment of a Risk-Based Capital Floor
On June 14, 2011, the FDIC Board of Directors approved a joint final rule to
implement certain requirements of Section 171 of the Dodd Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act), more generally known as the Collins
Amendment.
Section 171 requires, among other things, that the agencies' generally applicable
capital requirements serve as a floor for other capital requirements the agencies
may establish. Along with the Office of the Comptroller of the Currency (OCC) and
the Board of Governors of the Federal Reserve System (Federal Reserve), the FDIC is
modifying the advanced approaches capital rules consistent with Section 171.
Section 171 defines the "generally applicable" risk-based capital requirements as
those applied to insured institutions under the agencies' Prompt Corrective Action
regulations regardless of total consolidated assets or foreign exposure. The
agencies' general risk-based capital rules establish minimum capital requirements
pursuant to Prompt Corrective Action for all insured institutions regardless of
size. Accordingly, the agencies' general risk-based capital rules are the "generally
applicable risk-based capital requirements" as the term is defined in Section 171.
Again, as specified in Section 171, the generally applicable risk-based capital
requirements must serve as a floor for other capital requirements the agencies may
establish. However, the advanced approaches rules allows banks to operate with
capital requirements potentially well below the requirements generally applicable to
other banks.
For this reason, the FDIC is joining with the OCC and the Federal Reserve in
modifying the advanced approaches rules to be consistent with the capital floor
provisions of Section 171. The advanced approaches rule currently provides a series
of transitional floors allowing banks to operate during three transition periods
with risk-based capital requirements that are 95 percent, 90 percent, and 85
percent, respectively, of the risk-based capital requirements under the general
capital rules. The advanced approaches rule also provides the potential, after these
transition periods, for banks to operate without any floor on risk-based capital
requirements.
Consistent with Section 171, the agencies are eliminating the transitional floors in
the advanced approaches rules and replacing them with a permanent risk-based capital
floor equal to 100 percent of the capital requirements under the agencies' general
risk-based capital requirements.
Section 171 does not prevent the agencies from amending the generally applicable
capital requirements over time. However, as noted in the preamble to the final rule,
the new generally applicable capital requirements would become the new floor for
banking organizations using the advanced approaches rules.
Section 171 also provides that future versions of the generally applicable capital
requirements should not be quantitatively lower than the requirements in effect as
of the enactment of the Dodd-Frank Act. The preamble to the final rule notes the
agencies would envision performing quantitative analyses to avoid an impermissible
reduction in capital requirements. For example, the preamble states the agencies
would not anticipate requiring banks to compute two sets of generally applicable
requirements (the July 2010 requirements and some future modified set of
requirements).
The agencies also are allowing banks, in limited circumstances, to use the capital
requirements applicable to bank holding companies. These circumstances are limited
to situations where a bank could not hold the asset except under special authority,
and the asset has a risk profile lower than other assets receiving a risk weight
less than 100 percent. This change is intended to allow the Federal Reserve
increased flexibility to craft appropriate capital requirements for low-risk nonbank
assets in a way that is consistent with Section 171 and does not provide material
opportunities for depository institutions to engage in capital arbitrage.
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Sandra L. Thompson
Director
Risk Management Supervision
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