Rule Simplifies Regulator Capital

In an effort to reduce regulatory burden, in July 2019 the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (the “Agencies”) adopted a rule that simplifies several requirements for regulatory capital rules. The rule is in line with the Economic Growth and Regulatory Paperwork Reduction Act report issued by the Agencies in 2017, which committed to reducing regulatory burden for community banks. 

The rule applies to bank organizations with less than $250 billion in consolidated assets and less than $10 billion in total foreign exposure. The rule simplifies capital treatment for minority interest, certain deferred tax assets, and mortgage servicing assets.

The following points were taken from the rule:

  • Increases common equity tier 1 capital threshold deductions from 10 percent to 25 percent for mortgage servicing assets, deferred tax assets arising from temporary differences, and nonsignificant and significant investments in the capital of unconsolidated financial institutions.
  • Removes the need to distinguish between nonsignificant and significant investments in the capital of unconsolidated financial institutions.
  • Removes the aggregate 15 percent common equity tier 1 threshold deduction for mortgage servicing assets, deferred tax assets, and significant investments in the capital of unconsolidated financial institutions.
  • Replaces the convoluted methodology to decide the amount of minority interest included in the capital with a limit of 10 percent for minority interest includable in each tier of regulatory capital, less any deductions and adjustments.
  • Retains the 250 percent risk weight applicable to non-deducted amounts of mortgage servicing assets and deferred tax assets arising from temporary differences.
  • Requires a bank to apply the risk weight applicable to the exposure category of the investment for any non-deducted amount of investments in the capital of unconsolidated financial institutions.
  • Removes the 250 percent risk weight to be applied to non-deducted amounts of significant investments in the capital of unconsolidated financial institutions.
  • Allow bank holding companies and savings and loan holding companies to redeem common stock without prior approval unless otherwise required.

The rule will be effective as of April 1, 2020, for the amendment to capital rules and October 1, 2019, for the redemption of common stock and other technical amendments. An option for early adoption is permitted.