Implementation of Portions of the Collins Amendment: Proposed Rule Establishes Basel I-Based General Risk-Based Capital Guidelines as Floor for Banking Organizations Otherwise Subject to Basel II-Based Advanced Approach

Sullivan & Cromwell LLP - December 17, 2010

On December 14 and 15, 2010, Federal bank regulatory agencies published a joint notice of proposed rulemaking seeking comment on proposed regulations implementing certain aspects of Section 171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which section is often referred to as the Collins Amendment. The proposed regulations would require that the general minimum risk-based capital guidelines (based on Basel I) serve as a floor for banking organizations that, due to the amount of their total consolidated assets, foreign exposure and/or otherwise, are subject to the internal ratings based and advanced measurement approach minimum risk-based capital guidelines (based on Basel II). The notice further states that before changing their risk-based capital guidelines, the U.S. Federal bank regulatory agencies intend to determine whether proposed amendments thereto — for example, those implementing the Basel III accords — will result in capital or leverage requirements that are “quantitatively lower” than those generally applicable as of the date of enactment of the Dodd-Frank Act. Therefore, banking organizations should not be required by the Collins Amendment to also perform calculations of their legacy risk-based capital under the capital guidelines as in effect on July 21, 2010, even as such guidelines are amended over time.

The notice, however, does not address other aspects of the implementation of the Collins Amendment, including the details of the three year phase-out schedule for previously issued cumulative preferred stock and trust preferred securities that will no longer qualify as Tier 1 capital for certain bank holding companies beginning on January 1, 2013.