Key Aspects of the Proposed
Rule on Regulatory Capital Rules:
Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital
Adequacy, and Transition Provisions
The agencies are issuing a notice of proposed rulemaking (NPR, proposal, or proposed rule) to revise
the general risk-based capital rules to incorporate certain revisions by the Basel Committee on
Banking Supervision to the Basel capital framework (Basel III). The proposed rule would:
- Revise the definition of regulatory capital components and related calculations;
- Add a new regulatory capital component: common equity tier 1 capital;
- Increase the minimum tier 1 capital ratio requirement;
- Impose different limitations to qualifying minority interest in regulatory capital than those
currently applied;
- Incorporate the new and revised regulatory capital requirements into the Prompt Corrective Action
(PCA) capital categories;
- Implement a new capital conservation buffer framework that would limit payment of capital
distributions and certain discretionary bonus payments to executive officers and key risk takers if
the banking organization does not hold certain amounts of common equity tier 1 capital in addition
to those needed to meet its minimum risk-based capital requirements; and
- Provide for a transition period for several aspects of the proposed rule, including a phase-out
period for certain non-qualifying capital instruments, the new minimum capital ratio requirements,
the capital conservation buffer, and the regulatory capital adjustments and deductions.
This addendum presents a summary of the proposed rule that is more relevant for smaller,
non-complex banking organizations that are not subject to the market risk rule or the
advanced approaches capital rule. The agencies intend for this addendum to act as a guide for these
banking organizations, helping them to navigate the proposed rule and identify the changes most
relevant to them. The addendum does not, however, by itself provide a complete understanding of the
proposed rules and the agencies expect and encourage all institutions to review the proposed rule in
its entirety.
1. Revisions to the Minimum Capital Requirements
The NPR proposes definitions of common equity tier 1 capital, additional tier 1 capital, and total
capital. These proposed definitions would alter the existing definition of capital by imposing, among
other requirements, additional constraints on including of minority interests, mortgage servicing
assets (MSAs), deferred tax assets (DTAs) and certain investments in unconsolidated financial
institutions in regulatory capital. In addition, the NPR would require that most regulatory capital
deductions be made from common equity tier 1 capital. The NPR would also require that most of a
banking organization’s accumulated other comprehensive income (AOCI) be included in regulatory
capital.
Under the NPR, a banking organization would maintain the following minimum capital
requirements:
(1) A ratio of common equity tier 1capital to total risk-weighted assets of 4.5 percent.
(2) A ratio of tier 1 capital to total risk-weighted assets of 6 percent.
(3) A ratio of total capital to total risk-weighted assets of 8 percent.
(4) A ratio of tier 1 capital to adjusted average total assets of 4 percent. 1
The new minimum capital requirements would be implemented over a transition period, as outlined in
the proposed rule. For a summary of the transition period, refer to section 7 of this Addendum. As
noted in the NPR, banking organizations are generally expected, as a prudential matter, to operate
well above these minimum regulatory ratios, with capital commensurate with the level and nature of the
risks they hold.
2. Capital Conservation Buffer
In addition to these minimum capital requirements, the NPR would establish a capital conservation
buffer. Specifically, banking organizations would need to hold common equity tier 1 capital in excess
of their minimum risk-based capital ratios by at least 2.5 percent of risk-weighted assets in order to
avoid limits on capital distributions (including dividend payments, discretionary payments on tier 1
instruments, and share buybacks) and certain discretionary bonus payments to executive officers,
including heads of major business lines and similar employees.
Under the NPR, a banking organization’s capital conservation buffer would be the
smallest of the following ratios: a) its common equity tier 1 capital ratio (in percent) minus 4.5
percent; b) its tier 1 capital ratio (in percent) minus 6 percent; and c) its total capital ratio (in
percent) minus 8 percent.
To the extent a banking organization’s capital conservation buffer falls short of 2.5
percent of risk-weighted assets, the banking organization’s maximum payout amount for capital
distributions and discretionary bonus payments (calculated as the maximum payout ratio multiplied by
the sum of eligible retained income, as defined in the NPR) would decline. The following table shows
the maximum payout ratio, depending on the banking organization’s capital conservation buffer.
Table 1
|
Capital Conservation Buffer
(as a percentage of risk-weighted assets)
|
Maximum payout ratio (as a percentage or eligible retained
income)
|
Greater than 2.5 percent
|
No payout limitation applies
|
Less than or equal to 2.5 percent and greater than 1.875 percent
|
60 percent
|
Less than or equal to 1.875 percent and greater than 1.25 percent
|
40 percent
|
Less than or equal to 1.25 percent and greater than 0.625 percent
|
20 percent
|
Less than or equal to 0.625 percent
|
0 percent
|
Eligible retained income for purposes of the proposed rule would mean a banking organization’s
net income for the four calendar quarters preceding the current calendar quarter, based on the banking
organization’s most recent quarterly regulatory reports, net of any capital distributions and
associated tax effects not already reflected in net income.
Under the NPR, the maximum payout amount for the current calendar quarter would be equal to
the banking organization’s eligible retained income, multiplied by the applicable maximum payout
ratio in Table 1.
The proposed rule would prohibit a banking organization from making capital distributions or certain
discretionary bonus payments during the current calendar quarter if: (A) its eligible retained income
is negative; and (B) its capital conservation buffer ratio was less than 2.5 percent as of
the end of the previous quarter.
The NPR does not diminish the agencies’ authority to place additional limitations on capital
distributions.
3. Adjustments to Prompt Corrective Action (PCA) Thresholds
The NPR proposes to revise the PCA capital category thresholds to levels that reflect the new capital
ratio requirements. The NPR also proposes to introduce the common equity tier 1 capital ratio as a PCA
capital category threshold. In addition, the NPR proposes to revise the existing definition of
tangible equity. Under the NPR, tangible equity would be defined as tier 1 capital (composed of common
equity tier 1 and additional tier 1 capital) plus any outstanding perpetual preferred stock (including
related surplus) that is not already included in tier 1 capital.
Table 2. Proposed PCA Threshold Requirements*
|
PCA Capital Category
|
Threshold Ratios
|
Total Risk-based Capital ratio
|
Tier 1 Risk-based Capital ratio
|
Common Equity Tier 1 Risk-based Capital ratio
|
Tier 1 Leverage ratio
|
Well capitalized
|
10%
|
8%
|
6.5%
|
5%
|
Adequately capitalized
|
8%
|
6%
|
4.5%
|
4%
|
Undercapitalized
|
< 8%
|
< 6%
|
< 4.5%
|
<4%
|
Significantly undercapitalized
|
< 6%
|
< 4%
|
< 3%
|
<3%
|
Critically undercapitalized
|
Tangible Equity/Total Assets</=
2%
|
*Proposed effective date: January 1, 2015. This date coincides with the phasing in of the new minimum
capital requirements, which would be implemented over a transition period.
4. Definition of Capital
The NPR proposes to revise the definition of capital to include the following regulatory capital
components: common equity tier 1 capital, additional tier 1 capital, and tier 2 capital. These are
summarized below (see summary table attached). Section 20 of the proposed rule describes the capital
components and eligibility criteria for regulatory capital instruments. Section 20 also describes the
criteria that each primary federal supervisor would consider when determining whether a capital
instrument should be included in a specific regulatory capital component.
a. Common Equity Tier 1 Capital
The NPR defines common equity tier 1 capital as the sum of the common equity tier 1 elements, less
applicable regulatory adjustments and deductions. Common equity tier 1 capital elements would include:
- Common stock instruments (that satisfy specified criteria in the proposed rule) and related
surplus (net of any treasury stock);
- Retained earnings;
- Accumulated other comprehensive income (AOCI); and
- Common equity minority interest (as defined in the proposed rule) subject to the limitations
outlined in section 21 of the proposed rule.
b. Additional Tier 1 Capital
The NPR would define additional tier 1 capital as the sum of additional tier 1 capital elements and
related surplus, less applicable regulatory adjustments and deductions. Additional tier 1 capital
elements would include:
- Noncumulative perpetual preferred stock (that satisfy specified criteria in the proposed rule) and
related surplus;
- Tier 1 minority interest (as defined in the proposed rule), subject to limitations described in
section 21 of the proposed rule, not included in the banking organization’s common equity tier
1 capital; and
- Instruments that currently qualify as tier 1 capital under the agencies’ general risk-based
capital rules and that were issued under the Small Business Job’s Act of 2010, or, prior to
October 4, 2010, under the Emergency Economic Stabilization Act of 2008.
c. Tier 2 Capital
The proposed rule would define tier 2 capital as the sum of tier 2 capital elements and related
surplus, less regulatory adjustments and deductions. The tier 2 capital elements would include:
- Subordinated debt and preferred stock (that satisfy specified criteria in the proposed rule). This
will include most of the subordinated debt currently included in tier 2 capital according to the
agencies’ existing risk-based capital rules;
- Total capital minority interest (as defined in the proposed rule), subject to the limitations
described in section 21 of the proposed rule, and not included in the banking organization’s
tier 1 capital;
- Allowance for loan and lease losses (ALLL) not exceeding 1.25 percent of the banking
organization’s total risk-weighted assets; and
- Instruments that currently qualify as tier 2 capital under the agencies’ general risk-based
capital rules and that were issued under the Small Business Job’s Act of 2010, or, prior to
October 4, 2010, under the Emergency Economic Stabilization Act of 2008.
d. Minority Interest
The NPR proposes a calculation method that limits the amount of minority interest in a subsidiary
that is not owned by the banking organization that may be included in regulatory capital.
Under the NPR, common equity tier 1 minority interest would mean any minority interest arising
from the issuance of common shares by a fully consolidated subsidiary. Common equity tier 1 minority
interest may be recognized in common equity tier 1 only if both of the following are true:
- The instrument giving rise to the minority interest would, if issued by the banking organization
itself, meet all of the criteria for common stock instruments.
- The subsidiary is itself a depository institution.
If not recognized in common equity tier 1, the minority interest may be eligible for inclusion in
additional tier 1 capital or tier 2 capital.
For a capital instrument that meets all of the criteria for common stock instruments, the
amount of common equity minority interest includable in the banking organization’s common
equity tier 1 capital is equal to:
The common equity tier 1 minority interest of the subsidiary
minus
(The percentage of the subsidiary’s common equity tier 1
capital that is not owned by the banking organization)
multiplied by the difference between
(common equity tier 1 capital of the
subsidiary
and the lower of
- 7% of the risk weighted assets of the banking organization that relate to the
subsidiary or,
- 7% of the risk weighted assets of the subsidiary)
For tier 1 minority interest, the NPR proposes the same calculation method, but substitutes
tier 1 capital in place of common equity tier 1 capital and 8.5 percent in place of 7 percent in the
illustration above (and assuming the banking organization has a common equity tier 1 capital ratio of
at least 7 percent). In the case of tier 1 minority interest, there is no requirement that the
subsidiary be a depository institution. However, the NPR would require that any instrument giving rise
to the minority interest must meet all of the criteria for either a common stock instrument or an
additional tier 1 capital instrument.
For total capital minority interest, the NPR proposes an equivalent calculation method (by
substituting total capital in place of common equity tier 1 capital and 10.5 percent in place of 7
percent in the illustration above; and assuming the banking organization has a common equity tier 1
capital ratio of at least 7 percent). In the case of total capital minority interest, there is no
requirement that the subsidiary be a depository institution. However, the NPR would require that any
instrument giving rise to the minority interest must meet all of the criteria for either a common
stock instrument, an additional tier 1 capital instrument, or a tier 2 capital instrument.
e. Regulatory capital adjustments and deductions
A. Regulatory deductions from common equity tier 1 capital.
The NPR would require that a banking organization deduct the following from the sum of its common
equity tier 1 capital elements:
- Goodwill and all other intangible assets (other than MSAs), net of any associated deferred tax
liabilities (DTLs). Goodwill for purposes of this deduction includes any goodwill embedded in the
valuation of a significant investment in the capital of an unconsolidated financial institution in
the form of common stock.
- DTAs that arise from operating loss and tax credit carryforwards net of any valuation allowance
and net of DTLs (see section 22 of the proposed rule for the requirements on the netting of DTLs).
- Any gain-on-sale associated with a securitization exposure.
- Any defined benefit pension fund net asset 2, net of any associated deferred tax liability. 3 (The pension deduction does
not apply to insured depository institutions that have their own defined benefit pension
plan.)
B. Regulatory adjustments to common equity tier 1 capital.
The NPR would require that for the following items, a banking organization deduct any associated
unrealized gain and add any associated unrealized loss to the sum of common equity tier 1 capital
elements:
- Unrealized gains and losses on cash flow hedges included in AOCI that relate to the hedging of
items that are not recognized at fair value on the balance sheet.
- Unrealized gains and losses that have resulted from changes in the fair value of liabilities that
are due to changes in the banking organization’s own credit risk.
C. Additional deductions from regulatory capital
Under the NPR, a banking organization would be required to make the following deductions with respect
to investments in its own capital instruments:
- Deduct from common equity tier 1 elements investments in the banking organization’s own
common stock instruments (including any contractual obligation to purchase), whether held directly
or indirectly.
- Deduct from additional tier 1 capital elements, investments in (including any contractual
obligation to purchase) the banking organization’s own additional tier 1 capital instruments,
whether held directly or indirectly.
- Deduct from tier 2 capital elements, investments in (including any contractual obligation to
purchase) the banking organization’s own tier 2 capital instruments, whether held directly or
indirectly.
D. Corresponding deduction approach.
Under the NPR, a banking organization would use the corresponding deduction approach to calculate the
required deductions from regulatory capital for:
- Reciprocal cross-holdings;
- Non-significant investments in the capital of unconsolidated financial institutions; and,
- Non-common stock significant investments in the capital of unconsolidated financial
institutions.
Under the corresponding deduction approach, a banking organization would be required to make any such
deductions from the same component of capital for which the underlying instrument would qualify if it
were issued by the banking organization itself. In addition, if the banking organization does not have
a sufficient amount of such component of capital to effect the deduction, the shortfall will be
deducted from the next higher (that is, more subordinated) component of regulatory capital (for
example, if the exposure may be deducted from additional tier 1 capital but the banking organization
does not have sufficient additional tier 1 capital, it would take the deduction from common equity
tier 1 capital). The NPR provides additional information regarding the corresponding deduction
approach for those banking organizations with such holdings and investments.
Reciprocal crossholdings in the capital of financial institutions: The NPR would require a
banking organization to deduct investments in the capital of other financial institutions it holds
reciprocally 4.
Non-significant investments in the capital of unconsolidated financial institutions: 5 The proposed rule would
require a banking organization to deduct any non-significant investments in the capital of
unconsolidated financial institutions that, in the aggregate, exceed 10 percent of the sum of the
banking organization’s common equity tier 1 capital elements less all deductions and other
regulatory adjustments required under sections 22(a) through 22(c)(3) of the proposed rule (the 10
percent threshold for non-significant investments in unconsolidated financial institutions).
- The amount to be deducted from a specific capital component is equal to (i) the amount of a
banking organization’s non-significant investments exceeding the 10 percent threshold for
non-significant investments multiplied by (ii) the ratio of the non-significant investments
in unconsolidated financial institutions in the form of such capital component to the amount of the
banking organization’s total non-significant investments in unconsolidated financial
institutions.
- The banking organization’s non-significant investments in the capital of unconsolidated
financial institutions not exceeding the 10 percent threshold for non-significant investments must
be assigned the appropriate risk weight under the Standardized Approach NPR.
Significant investments in the capital of unconsolidated financial institutions that are not in
the form of common stock: A banking organization must deduct its significant investments
in the capital of unconsolidated financial institutions not in the form of common stock.
E. Threshold Deductions:
The NPR would require a banking organization to deduct from common equity tier 1 capital elements
each of the following assets (together, the threshold deduction items) that, individually, are above
10 percent of the sum of the banking organization’s common equity tier 1 capital elements,
less all required adjustments and deductions required under sections 22(a) through 22(c) of the
proposed rule (the 10 percent common equity deduction threshold):
- DTAs arising from temporary differences that the banking organization could not realize through
net operating loss carrybacks, net of any associated valuation allowance, and DTLs, subject to the
following limitations:
- Only the DTAs and DTLs that relate to taxes levied by the same taxation authority and that are
eligible for offsetting by that authority may be offset for purposes of this deduction.
- The DTLs offset against DTAs must exclude amounts that have already been netted against other
items that are either fully deducted (such as goodwill) or subject to deduction (such as MSA).
- MSAs, net of associated DTLs.
- Significant investments in the capital of unconsolidated financial institutions in the form of
common stock.
In addition, the aggregate amount of the threshold deduction items in this section cannot exceed
15 percent of the banking organization’s common equity tier 1 capital net of all
deductions (the 15 percent common equity deduction threshold). That is, the banking organization must
deduct from common equity tier 1 capital elements, the amount of the threshold deduction items that
are not deducted after the application of the 10 percent common equity deduction threshold, and that,
in aggregate, exceed 17.65 percent of the sum of the banking organization’s common equity tier 1
capital elements, less all required adjustments and deductions required under sections 22(a) through
22(c) of the proposed rule and less the threshold deduction items in full.
5. Changes in Risk-weighted Assets:
The amounts of the threshold deduction items within the limits and not deducted, as described above,
would be included in the risk-weighted assets of the banking organization and assigned a risk weight
of 250 percent. In addition, certain exposures that are currently deducted under the general
risk-based capital rules, for example certain credit enhancing interest-only strips, would receive a
1,250% risk weight.
6. Timeline and Transition Period
The NPR would provide for a multi-year implementation as summarized in the table below:
Table 3 - Phase-in Schedule
|
Year (as of Jan. 1)
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
Minimum common equity tier 1 ratio
|
3.5%
|
4.0%
|
4.5%
|
4.5%
|
4.5%
|
4.5%
|
4.5%
|
Common equity tier 1 capital conservation buffer
|
|
|
|
0.625%
|
1.25%
|
1.875%
|
2.50%
|
Common equity tier 1 plus capital conservation buffer
|
3.5%
|
4.0%
|
4.5%
|
5.125%
|
5.75%
|
6.375%
|
7.0%
|
Phase-in of deductions from common equity tier 1 (including threshold deduction items that are
over the limits)
|
|
20%
|
40%
|
60%
|
80%
|
100%
|
100%
|
Minimum tier 1 capital
|
4.5%
|
5.5%
|
6.0%
|
6.0%
|
6.0%
|
6.0%
|
6.0%
|
Minimum tier 1 capital plus capital conservation buffer
|
|
|
|
6.625%
|
7.25%
|
7.875%
|
8.5%
|
Minimum total capital
|
8.0%
|
8.0%
|
8.0%
|
8.0%
|
8.0%
|
8.0%
|
8.0%
|
Minimum total capital plus conservation buffer
|
8.0%
|
8.0%
|
8.0%
|
8.625%
|
9.25%
|
9.875%
|
10.5%
|
As provided in Basel III, capital instruments that no longer qualify as additional tier 1 or tier 2
capital will be phased out over a 10 year horizon beginning in 2013. However, trust preferred
securities are phased out as required under the Dodd-Frank Act.
Attached to this Addendum is a summary of the proposed revision to the components of capital
introduced by the NPR.
Attachment: Summary of Capital Components in this NPR
Components and Tiers
|
Explanation
|
(1) COMMON EQUITY TIER 1 CAPITAL
|
|
(a) + Qualifying common stock instruments
|
Instruments must meet all of the common equity tier 1 criteria (Note 1)
|
(b) + Retained earnings
|
|
(c) + AOCI
|
With the exception in Note 2 below, AOCI flows through to common equity tier 1 capital.
|
(d) + Qualifying common equity tier 1 minority interest
|
Subject to specific calculation method and limitation.
|
(e) - Regulatory deductions from common equity tier 1 capital
|
Deduct: Goodwill and intangible assets (other than MSAs); DTAs that arise from operating
loss and tax credit carryforwards; any gain on sale from a securitization; investments in the
banking organization’s own common stock instruments.
|
(f) +/- Regulatory adjustments to common equity tier 1 capital
|
See explanation below (Note 2).
|
(g) - common equity tier 1 capital deductions per the
corresponding deduction approach
|
See section 4.e.D above.
|
(h) - Threshold deductions
|
Deduct amount of threshold items that are above the 10 and 15 percent common equity tier 1
thresholds. (See section 4.e. above).
|
= common equity tier 1 capital
|
|
(2) ADDITIONAL TIER 1 CAPITAL
|
|
(a) + additional tier 1 capital instruments
|
Instruments must meet all of the additional tier 1 criteria (Note 1).
|
(b) + Tier 1 minority interest that is not included in common equity
tier 1 capital
|
Subject to specific calculation and limitation
|
(c) + Non-qualifying tier 1 capital instruments subject to transition
phase-out and SBLF related instruments
|
(Note 3)
|
(d) - Investments in a banking organization’s own additional
tier 1 capital instruments
|
|
(e) - Additional tier 1 capital deductions per the corresponding
deduction approach
|
See section 4.e.D above.
|
= Additional tier 1 capital
|
|
(3) TIER 2 CAPITAL
|
|
(a) + Tier 2 capital instruments
|
Instruments must meet all of the tier 2 criteria (Note 1)
|
(b) + Total capital minority interest that is not included in tier 1
|
Subject to specific calculation and limitation.
|
(c) + ALLL
|
Up to 1.25% of risk weighted assets
|
(d) - Investments in a banking organization’s own tier 2 capital
instruments
|
|
(e) - Tier 2 capital deductions per the Corresponding Deduction
Approach
|
See section 4.e.D above.
|
(f) + Non-qualifying tier 2 capital instruments subject to transition
phase-out and SBLF related instruments
|
(Note 3)
|
= Tier 2 capital
|
|
TOTAL CAPITAL = common equity tier 1 + additional tier 1 + tier 2
|
|
Notes to Table:
Note 1: Includes surplus related to the instruments.
Note 2: Regulatory adjustments: A banking organization must deduct any unrealized gain and add
any unrealized loss for cash flow hedges included in AOCI relating to hedging of items not fair valued
on the balance sheet and for unrealized gains and losses that have resulted from changes in the fair
value of liabilities that are due to changes in the banking organization’s own credit risk.
Note 3: Grandfathered SBLF related instruments: These are instruments issued under the
Small Business Lending Facility (SBLF); or prior Oct. 4, 2010 under the Emergency Economic
Stabilization Act of 2008. If the instrument qualified as tier 1 capital under rules at the time of
issuance, it would count as additional tier 1 under this proposal. If the instrument qualified as tier
2 under the rules at that time, it would count as tier 2 under this proposal.
Attachment: Comparison of Current Rules vs. Proposal
Minimum regulatory capital requirements
|
|
Current minimum ratios
|
Proposed minimum ratios
|
Comments
|
Common equity tier 1 capital / risk weighted assets
|
N/A
|
4.5%
|
|
Tier 1 capital / risk weighted assets
|
4%
|
6%
|
|
Total capital / risk weighted assets
|
8%
|
8%
|
|
Leverage ratio
|
≥ 4% (or ≥ 3%)
|
≥ 4%
|
Minimum required level will not vary depending on the supervisory rating
|
Capital buffers
|
|
Current treatment
|
Proposed treatment
|
Comment
|
Capital conservation buffer
|
N/A
|
Capital conservation buffer equivalent to 2.5% of risk-weighted assets; composed of common
equity tier 1 capital
|
Not holding the capital conservation buffer may result in restrictions on capital distributions
and certain discretionary bonus payments
|
Prompt Corrective Action
|
|
Current PCA levels
|
Proposed PCA levels
|
Comment
|
Common equity tier 1 capital
|
N/A
|
Well capitalized: ≥ 6.5%;
Adequately capitalized: ≥ 4.5%;
Undercapitalized: < 4.5%;
Significantly undercapitalized: < 3%
|
Proposed adequately capitalized PCA level aligned to new minimum ratio
|
Tier 1 capital
|
Well capitalized: ≥ 6%;
Adequately capitalized: ≥ 4%;
Undercapitalized < 4%;
Significantly undercapitalized: < 3%
|
Well capitalized: ≥ 8%;
Adequately capitalized: ≥ 6%;
Undercapitalized < 6%;
Significantly undercapitalized: < 4%
|
Proposed adequately capitalized PCA level aligned to new minimum ratio
|
Total capital
|
Well capitalized: ≥ 10%;
Adequately capitalized: ≥ 8%;
Undercapitalized < 8%;
Significantly undercapitalized: < 6%
|
Well capitalized: ≥ 10%;
Adequately capitalized: ≥ 8%;
Undercapitalized < 8%;
Significantly undercapitalized: < 6%
|
|
Leverage ratio
|
Well capitalized: ≥ 5%;
Adequately capitalized: ≥ 4% (or ≥ 3%);
Undercapitalized < 4% (or < 3%);
Significantly undercapitalized: < 3%
|
Well capitalized: ≥ 5%;
Adequately capitalized: ≥ 4%;
Undercapitalized < 4%;
Significantly undercapitalized: < 3%
|
PCA adequately capitalized level will not vary depending on the supervisory rating
|
Critically undercapitalized category
|
Tangible equity to total assets ratio ≤ 2
|
Tangible equity to total assets ≤ 2
|
Tangible equity under the proposal would be defined as tier 1 capital plus non-tier 1
perpetual preferred stock
|
Regulatory Capital Components
|
|
Current definition / instruments
|
Proposed definition / instruments
|
Comments
|
Common equity tier 1 capital
|
No specific definition
|
Mostly retained earnings and common stock that meets specified eligibility criteria (plus
limited amounts of minority interest in the form of common stock) less the majority of the
regulatory deductions
|
Common stock instruments traditionally issued by U.S. banking organizations expected generally
to qualify as common equity tier 1 capital
|
Additional tier 1 capital
|
No specific definition
|
Equity capital instruments that meet specified eligibility criteria (plus limited amounts of
minority interest in the form of tier 1 capital instruments)
|
Non-cumulative perpetual preferred stock traditionally issued by U.S. banking organizations
expected to generally qualify; trust preferred instruments traditionally issued by certain bank
holding companies would not qualify
|
Tier 2 capital
|
Certain capital instruments (e.g., subordinated debt) and limited amounts of ALLL
|
Capital instruments that meet specified eligibility criteria (e.g., subordinated debt) and
limited amounts of ALLL
|
Traditional subordinated debt instruments are expected to remain tier 2 eligible; there is no
specific limitation on the amount of tier 2 capital that can be included in total capital under
the proposal
|
Regulatory deductions and adjustments
|
|
Current treatment
|
Proposed treatment
|
Comment
|
Regulatory deductions
|
Current deductions from regulatory capital include goodwill and other intangibles, DTAs (above
certain levels), and MSAs (above certain levels)
|
Proposed deductions from common equity tier 1 capital include goodwill and other intangibles,
DTAs (above certain levels), MSAs (above certain levels) and investments in unconsolidated
financial institutions (above certain levels)
|
Vast majority of regulatory deductions are made at the common equity tier 1 capital level (as
opposed to the tier 1 level); the proposed deductions for MSAs and DTAs in the proposed rule are
significantly more stringent than the current deductions
|
Regulatory adjustments
|
Current adjustments include the neutralization of unrealized gains and losses on available for
sale debt securities for regulatory capital purposes
|
Under the proposal, AOCI would generally flow through to regulatory capital
|
Under the proposed treatment unrealized gains and losses on available for sale debt securities
would not be neutralized for regulatory capital purposes
|
MSAs, certain DTAs arising from temporary differences, and certain significant investments in
the common stock of unconsolidated financial institutions
|
MSAs and DTAs that are not deducted are subject to a 100 percent risk weight
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Items that are not deducted are subject to a 250 percent risk weight
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Under the proposal, these items are subject to deduction if they exceed certain specified
common equity deduction thresholds
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The portion of a CEIO that does not constitute an after-tax-gain-on-sale
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Dollar-for-dollar capital requirement for amounts not deducted based on a concentration limit
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Subject to a 1250 percent risk weight
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1 Banking organizations
should be aware that their leverage ratio requirements would be affected by the new definition of
tier 1 capital under this proposal. See section 4 of this addendum on the definition of capital.
2 With prior approval
of the primary federal supervisor, the banking organization may reduce the amount to be deducted
by the amount of assets of the defined benefit pension fund to which it has unrestricted and
unfettered access, provided that the banking organization includes such assets in its
risk-weighted assets as if the banking organization held them directly. For this purpose,
unrestricted and unfettered access means that the excess assets of the defined pension fund would
be available to protect depositors or creditors of the banking organization in a receivership,
insolvency, liquidation, or similar proceeding.
3 The deferred tax
liabilities for this deduction exclude those deferred tax liabilities that have already been
netted against DTAs.
4 An instrument is held
reciprocally if the instrument is held pursuant to a formal or informal arrangement to swap,
exchange, or otherwise intend to hold each other’s capital instruments.
5 With prior written
approval of the primary federal supervisor, for the period of time stipulated by the primary
federal supervisor, a banking organization would not be required to deduct exposures to the
capital instruments of unconsolidated financial institutions if the investment is made in
connection with the banking organization providing financial support to a financial institution in
distress.
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