By Benjamin E. Streckert
January 5, 2018
On September 27, 2017, the FDIC, the Federal Reserve, and the OCC (the “Agencies”) issued a proposed rule that simplifies the compliance requirements of the existing regulatory capital rules and is intended to reduce the regulatory burden imposed by it. Developed with small- and medium-sized banks in mind, the proposed rule would:
- replace the complex definition of high volatility commercial real estate exposures in the standardized approach capital framework with a more straightforward definition for higher-risk acquisition, development, or construction loans called high volatility acquisition, development, or construction;
- simplify the threshold deduction treatment for mortgage servicing assets, temporary difference deferred tax assets not realizable through carryback, and investments in the capital of unconsolidated financial institutions; and
- simplify the limitations on minority interest includable in regulatory capital.
The Conference of State Bank Supervisors (the “CSBS”) recently submitted a comment letter on the proposed rule. The letter commends the Agencies’ desire to simplify the regulatory capital rules but argues that the proposed rule does not do enough. In the CSBS’s words, “[t]he staggering complexity of the current regulatory capital rules imposes an unsustainable burden on community banks” and “fail[s] to increase the risk-sensitivity of the capital rules for community banks.” Further, it argues that the “sheer complexity of the capital rules . . . may cause smaller . . . institutions to forego advantageous opportunities due to the uncertainty surrounding their treatment under the . . . capital rules.” Accordingly, the CSBS proposes that the Agencies develop a simplified capital framework for smaller, community banks that would streamline the methodology for calculating risk-weighted assets.
The CSBS suggests eliminating or consolidating exposure categories and risk weights intended to capture activities in which “non-complex” financial institutions do not routinely engage. This would ease the burden of implementation costs related to establishing new systems and hiring and training personnel to navigate categories of assets or exposure that community banks rarely encounter. The CSBS also proposes other solutions to the growing regulatory burden that are particularly tailored to benefit community banks.
Although the CSBS’s letter is only a comment to the Agencies’ proposed rule, it does show that regulatory concerns specific to community banks are being brought to the attention of the federal regulators.
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