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Basel III Treatment of DTAs and MSAs

October 9, 2017

Authors

Robert Klingler

Basel III Treatment of DTAs and MSAs

October 9, 2017

by: Robert Klingler

We have heard, read and seen (and internally had) some confusion regarding the joint proposed rulemaking regarding the potential simplification of the capital rules as they relate to Mortgage Servicing Assets (MSAs) and certain Deferred Tax Assets (DTAs).

In addition to simply being complicated regulations, the regulators also have two proposed rulemakings outstanding related to these items. In August 2017, the banking regulators jointly sought public comment on proposed rules (the “Transition NPR“) that proposed to extend the treatment of MSAs and certain DTAs based on the 2017 transition period. Then, in September 2017, the banking regulators jointly sought comment on proposed rules (the “Simplification NPR“) that proposed to alter the limitations on treatment of MSAs and certain DTAs (and also addressed High Volatility Commercial Real Estate or HVCRE

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HVCRE Update – New Interagency FAQ

April 14, 2015

Authors

Jerry Blanchard

HVCRE Update – New Interagency FAQ

April 14, 2015

by: Jerry Blanchard

As previously mentioned, the federal banking regulators have been working on a FAQ on the topic. The interagency FAQ was published on April 6, 2015. While there were no surprises in what was published there were a number of takeaways from the FAQ that lenders need to keep in mind and I have added those to my previous list of FAQ. Under Basel III, as a general rule, a lender applies a 100% risk weighting to all corporate exposures, including bonds and loans. There are various exceptions to that rule, one of which involves what is referred to as “High Volatility Commercial Real Estate” (“HVCRE”) loans. Simply put, acquisition, development and construction loans are viewed as a more risky subset of commercial real estate loans and are assigned a risk weighting of 150%.

HVCRE is defined to include credit facility that, prior to conversion to permanent financing, finances

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High Volatility CRE Rules and Contributed Capital

March 30, 2015

Authors

Jerry Blanchard

High Volatility CRE Rules and Contributed Capital

March 30, 2015

by: Jerry Blanchard

The new risk weighting rules applicable to commercial real estate are now fully in effect for all banks. The rule flows out of the new capital rulemaking carried out by the federal banking agencies as a result of Basel III. As a general rule, the agencies agreed to apply a 100% risk weighting to all corporate exposures, including bonds and loans. There were various exceptions to that rule, one of which involves what is referred to as “High Volatility Commercial Real Estate” (“HVCRE”) loans. Simply put, acquisition, development and construction loans are viewed as a more risky subset of commercial real estate loans and are assigned a risk weighting of 150%.

HVCRE is defined to include credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction (ADC) of real property, unless the facility finances:

  • One- to four-family residential properties;
  • Real property that
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  • AOCI Opt-out Election Process

    February 18, 2015

    Authors

    Robert Klingler

    AOCI Opt-out Election Process

    February 18, 2015

    by: Robert Klingler

    In connection with the effectiveness of BASEL III, most banks are required to decide whether to elect to opt-out of the inclusion of Accumulated Other Comprehensive Income (“AOCI”) in their Common Equity Tier 1 Capital.  All non-advanced approaches institutions (i.e.  banks less than $250 billion in total assets with less than $10 billion in on-balance sheet foreign exposure) will need to indicate whether they are making the AOCI opt-out in their March 31, 2015 Call Reports.  This is a one-time election and generally irrevocable, except in the limited cases of subsequent mergers between institutions with different elections.

    As a reminder, AOCI includes such items as unrealized gains and losses on certain securities.

    For institutions that opt out, most AOCI items will not be included in the calculation of Common Equity Tier 1 Capital (and thus Tier 1 Capital generally). In other words, most AOCI items will be treated, for regulatory

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    BASEL III: The Final Rules are Here and It’s Time to Get Ready

    August 14, 2013

    Authors

    Jonathan Hightower

    BASEL III: The Final Rules are Here and It’s Time to Get Ready

    August 14, 2013

    by: Jonathan Hightower

    Over the past year, my colleagues and I have spent an untold number of hours researching, writing and speaking about the Basel III capital rules. We felt it important to help bankers focus on the proposed rules in order to help them prepare and to help facilitate an appropriate response to the proposed rules. Because the rules were in proposed form, however, many bankers, bank directors and industry participants did not focus on these capital rules, instead waiting until they were finalized. Well, we’re here.

    Earlier this month, the regulatory agencies finalized their revisions to the capital and risk-weighting rules, commonly known as the Basel III rules. Even though the rules will not be effective for most banks until Jan. 1, 2015, the finalizing of these rules presents the call to action to begin the dialogue about how the new rules will impact your

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    Wow! The Fed responds to comments from Community Banks on Basel III

    July 2, 2013

    Authors

    Jonathan Hightower

    Wow! The Fed responds to comments from Community Banks on Basel III

    July 2, 2013

    by: Jonathan Hightower

    While the final Basel III capital rules have not been published at the time of this post, it was clear from this morning’s comments at the meeting of the Board of Governors of the Federal Reserve System that community banks have been heard. Highlights from the meeting include the following positions of the Federal Reserve on the Basel III rules.

    •  AOCI – Non-internationally active financial institutions (i.e., all community banks) will be allowed a one-time option to opt out of the inclusion of accumulated other comprehensive income in Tier 1 regulatory capital. This opt-out option will ease the potential burden on community banks from incorporating fluctuations in the value of their available for sale securities portfolio in their regulatory capital calculations. We view this as a big win for community banks.
    • Mortgage Loan Risk-Weighting – Many community banks expressed a great deal of concern with the proposed risk weighting
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    Regulators Announce Delay in Adoption of Final Basel III Capital Rules

    November 9, 2012

    Authors

    Jonathan Hightower

    Regulators Announce Delay in Adoption of Final Basel III Capital Rules

    November 9, 2012

    by: Jonathan Hightower

    Given the tremendous volume of comments from industry participants regarding the Basel III capital rules and the mounting political pressure regarding adoption of the rules, many industry observers had speculated that the Federal Reserve, FDIC, and OCC would be challenged to adopt the final rules before January 1, 2013 (the date established for effectiveness of portions of the rule in the release of the proposed rules). On November 9, 2012, the agencies announced that they indeed will not be able to meet that deadline.   This announcement runs contrary to the recently renewed directive by the Basel Committee on Banking Supervision for all members of the committee to adopt final rules prior to January 1, 2013. However, we believe it is appropriate for the U.S. regulatory agencies to carefully consider the impact of the rules on the U.S. banking system, particularly in light of our unique community banking system, and support

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    Fall 2012 Update on Regulatory and Legal Changes Affecting Community Banks

    October 30, 2012

    Authors

    Dan Wheeler

    Fall 2012 Update on Regulatory and Legal Changes Affecting Community Banks

    October 30, 2012

    by: Dan Wheeler

    Bank regulators have been as busy as usual in 2012, but some of the more interesting regulatory and legal changes have come from non-bank regulators and the courts. And, the JOBS Act changes described below actually lifts the regulatory burden on banks a bit, a rare respite in an otherwise challenging regulatory environment.

    The JOBS Act eases bank capital activities and M&A.  The Jumpstart Our Business Startups Act affects community banks in 4 key ways:

    • “Going public” is easier. Banks that have less than $1 billion in gross revenue can qualify as an “emerging growth” company and take advantage of relaxed rules that allow them to “test the waters” and obtain a confidential prior review of an IPO filing by the SEC, provide reduced executive compensation disclosures and file without a SOX 404 attestation by the bank’s auditors.
    • The “crowdfunding” rule (expected in early 2013)
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    Basel III Proposals Will Bring Changes to the Accounting of Bank Securities Portfolios

    October 16, 2012

    Authors

    Michael Shumaker

    Basel III Proposals Will Bring Changes to the Accounting of Bank Securities Portfolios

    October 16, 2012

    by: Michael Shumaker

    As part of the proposed Basel III capital rules, banks will be required to hold a greater portion of their total capital in the form of common equity. With the creation of a new Common Equity Tier 1 (“CET1”) ratio to be included with other minimum capital ratios and a new Capital Conservation Buffer to be composed exclusively of common equity, the proposed new capital rules signal a regulatory departure from allowing forms of hybrid capital to constitute a significant amount of a bank’s total capital. While the impacts of the new preference for CET1 will be significant, the methodology for calculating the CET1 ratio will also affect the interest rate and liquidity risk management tools available to community banks.

    In calculating the new CET1 ratio under the proposed rules, banks would be required to include Accumulated Other Comprehensive Income (“AOCI”) as part of CET1. For most community banks, the primary driver

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    The Georgia Bankers Association Delivers a Detailed Critique of the Basel III Proposals

    October 15, 2012

    Authors

    Bryan Cave

    The Georgia Bankers Association Delivers a Detailed Critique of the Basel III Proposals

    October 15, 2012

    by: Bryan Cave

    On October 12, 2012, the Georgia Bankers Association (the “GBA”) delivered a public comment letter on the proposed Basel III capital rules and the related proposed risk-weighting rules. A copy of the letter is available for viewing here.  In the comment letter, the GBA identifies over a dozen categories of key flaws in the proposed rules and concludes that the proposals should be withdrawn for further study or, at the very least, should be modified to exempt community and regional banks from their requirements.

    The GBA takes the position in the comment letter that the regulatory agencies have a duty to apply the principles that they espouse for stress testing and enterprise risk management to their own rulemaking process. The GBA argues that the proposals are likely to introduce complementary risks to financial institutions, especially community banks, the impacts of which are not yet fully

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