Bank Capital Requirements: Federal Banking Agencies Propose Capital Rule Simplifications to the Standardized Approach Calculations Applicable Primarily to Non-Advanced Approaches Banking Organizations

Sullivan & Cromwell LLP - October 4, 2017

On September 27, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a proposed rule  that they describe as simplifying compliance with certain aspects of the agencies’ capital rules. The proposed changes would apply only to standardized approach calculations and, except for revisions to the treatment of acquisition, development, and construction exposures, the proposed changes would apply only to banking organizations that are not subject to the advanced approaches capital rules. The key proposed changes relate to the regulatory capital treatment for mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interests. These changes would both simplify the calculations and have the impact of increasing regulatory capital ratios for some non-advanced approaches banking organizations. The proposed changes also include revisions to the treatment of acquisition, development, and construction exposures that are designed to address concerns regarding the current definition of high volatility commercial real estate exposure under the standardized approach. The agencies also propose what are described as “additional clarifications and technical amendments” applicable to both advanced approaches and standardized approach calculations by all banking organizations.