Basel III: New, stricter reserve requirements delayed

On Friday, November 9, the Federal Reserve Board, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency issued a joint statement delaying the implementation date of the recently approved regulatory capital standards. However, they did indicate that they are committed to implementing the rules.

These standards, when they become effective, will mean new, tougher capital requirements for banks, especially those with assets in excess of $10 billion.

The Basel III capital standards, approved by the Federal Reserve Board on June 7, and embraced by all US bank regulatory agencies, increase the minimum levels of required capital, including the requirement of a "capital buffer," narrow the definition of that capital, and increase the risk weighting for several asset classes.

To bring the United States more in line with international bank capital standards and help cushion banks against financial shocks, Basel III will require large banks to hold more than three times the amount of common-equity capital: 7% of risk-based assets, as compared to the 2% currently required. The new regulations are expected to be phased in between the now to-be-determined effective date and 2019.

The effect on bank balance sheets will be significant. The Federal Reserve estimates that the 19 largest US bank holding companies will be required to maintain $841 billion in capital, a $50 billion increase from the current $791 in capital. Smaller banks, according to the Federal Reserve, would cumulatively have to raise approximately $10 billion in capital to meet the new regulations. These amounts do not contemplate the additional capital that would likely need to be raised by smaller banks in response to the anticipated "trickle down" of the new capital standards.

Reweighting risk

The Fed proposal also changes the risk weighting of certain commercial real estate loans, from 100% to 150%. The new regulations also introduce a new, narrow capital measure called Common Equity Tier 1 (CET1). CET1 is defined as outstanding common equity and related surplus, retained earnings, accumulated other comprehensive income, and minority interests (subject to certain limitations), less goodwill and other adjustments, including adjustments for assets such as mortgage servicing rights and derivative instruments.

Once an implementation date is set, banks will have to meet minimum capital requirements of 3.5% share capital, 4.5% Tier-1 capital, and 8% total capital. From inception to 2019, these ratios will gradually increase to 4.5% share capital, 6% Tier-1 capital, and 8% total capital.