The Basel iii framework after the Dodd Frank Act in the United States of America

July 2, 2013 - The Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System adopted a final rule that revised their risk-based and leverage capital requirements for banking organizations.

The final rule consolidates three separate notices of proposed rulemaking that the OCC, Board, and FDIC published in the Federal Register on August 30, 2012, with selected changes.

The final rule implements a revised definition of regulatory capital, a new common equity tier 1 minimum capital requirement, a higher minimum tier 1 capital requirement, and, for banking organizations subject to the advanced approaches risk-based capital rules, a supplementary leverage ratio that incorporates a broader set of exposures in the denominator.

The final rule incorporates these new requirements into the agencies' prompt corrective action (PCA) framework. In addition, the final rule establishes limits on a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.

Further, the final rule amends the methodologies for determining risk-weighted assets for all banking organizations, and introduces disclosure requirements that would apply to top-tier banking organizations domiciled in the United States with $50 billion or more in total assets.

The final rule adopts changes to the agencies' regulatory capital requirements that meet the requirements of section 171 and section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The final rule codifies the agencies' regulatory capital rules, which have previously resided in various appendices to their respective regulations, into a harmonized integrated regulatory framework.

In addition, the OCC is amending the market risk capital rule (market risk rule) to apply to Federal savings associations, and the Board is amending the advanced approaches and market risk rules to apply to top-tier savings and loan holding companies domiciled in the United States, except for certain savings and loan holding companies that are substantially engaged in insurance underwriting or commercial activities, as described in this preamble.

The final rule replaces the agencies' general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules in accordance with the transition provisions described below.

After considering the comments received, the agencies have made substantial modifications in the final rule to address specific concerns raised by commenters regarding the cost, complexity, and burden of the proposals.

During the recent financial crisis, lack of confidence in the banking sector increased banking organizations' cost of funding, impaired banking organizations' access to short-term funding, depressed values of banking organizations' equities, and required many banking organizations to seek government assistance.

Concerns about banking organizations arose not only because market participants expected steep losses on banking organizations' assets, but also because of substantial uncertainty surrounding estimated loss rates, and thus future earnings.

Further, heightened systemic risks, falling asset values, and reduced credit availability had an adverse impact on business and consumer confidence, significantly affecting the overall economy.

The final rule addresses these weaknesses by helping to ensure a banking and financial system that will be better able to absorb losses and continue to lend in future periods of economic stress.

This important benefit in the form of a safer, more resilient, and more stable banking system is expected to substantially outweigh any short-term costs that might result from the final rule.

In this context, the agencies are adopting most aspects of the proposals, including the minimum risk-based capital requirements, the capital conservation and countercyclical capital buffers, and many of the proposed risk weights.

The agencies have also decided to apply most aspects of the Basel III NPR and Standardized Approach NPR to all banking organizations, with some significant changes.

Implementing the final rule in a consistent fashion across the banking system will improve the quality and increase the level of regulatory capital, leading to a more stable and resilient system for banking organizations of all sizes and risk profiles.

The improved resilience will enhance their ability to continue functioning as financial intermediaries, including during periods of financial stress and reduce risk to the deposit insurance fund and to the financial system.

The agencies believe that, together, the revisions to the proposals meaningfully address the commenters' concerns regarding the potential implementation burden of the proposals.

The agencies have considered the concerns raised by commenters and believe that it is important to take into account and address regulatory costs (and their potential effect on banking organizations' role as financial intermediaries in the economy) when the agencies establish or revise regulatory requirements.

In developing regulatory capital requirements, these concerns are considered in the context of the agencies' broad goals--to enhance the safety and soundness of banking organizations and promote financial stability through robust capital standards for the entire banking system.

The agencies participated in the development of a number of studies to assess the potential impact of the revised capital requirements, including participating in the BCBS's Macroeconomic Assessment Group as well as its QIS, the results of which were made publicly available by the BCBS upon their completion.

The BCBS analysis suggested that stronger capital requirements help reduce the likelihood of banking crises while yielding positive net economic benefits.

To evaluate the potential reduction in economic output resulting from the new framework, the analysis assumed that banking organizations replaced debt with higher-cost equity to the extent needed to comply with the new requirements, that there was no reduction in the cost of equity despite the reduction in the riskiness of banking organizations' funding mix, and that the increase in funding cost was entirely passed on to borrowers.

Given these assumptions, the analysis concluded there would be a slight increase in the cost of borrowing and a slight decrease in the growth of gross domestic product.

The analysis concluded that this cost would be more than offset by the benefit to gross domestic product resulting from a reduced likelihood of prolonged economic downturns associated with a banking system whose lending capacity is highly vulnerable to economic shocks.

A final rule that makes technical changes to the Board's market risk capital rule

December 6, 2013 - The Federal Reserve Board issued a final rule that makes technical changes to the Board's market risk capital rule to align it with the Basel III revised capital framework adopted by the Board earlier this year.

The market risk capital rule is used by banking organizations with significant trading activities to calculate regulatory capital requirements for market risk. Technical changes to the rule reflect modifications by the Organization for Economic Cooperation and Development regarding country risk classifications.

The final rule also clarifies criteria for determining whether underlying assets are delinquent for certain traded securitization positions. It clarifies disclosure deadlines, and modifies the definition of a covered position. Each of these changes makes the market risk capital rule consistent with the revised capital framework that will come into effect in January 2015.

Also, the Federal Reserve made minor modifications to the Basel III revised capital framework to clarify the criteria for subordinated debt instruments that may be counted as tier 2 capital.

Technical Corrections and Clarifications to the Capital Rules Applicable to Advanced Approaches Banking Organizations

November 18, 2014 - Agencies Propose Technical Corrections and Clarifications to the Capital Rules Applicable to Advanced Approaches Banking Organizations

The Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency today proposed clarifications to the revised regulatory capital rules adopted by the agencies in July 2013.

The proposal applies only to large internationally active banking organizations that currently determine their regulatory capital ratios under the advanced approaches rule, or may use the advanced approaches rule in the future--generally those with at least $250 billion in total consolidated assets or at least $10 billion in total on-balance sheet foreign exposures.

Specifically, the proposed rule would make technical corrections and clarify certain aspects of the advanced approaches rule, including the qualification criteria and calculation requirements for risk-weighted assets. Many of the proposed changes would better align the advanced approaches rule with the Basel framework and thereby enhance consistency with international capital standards.


Connect with a global community of professionals to gain insight into the G20 efforts to regulate the global financial system, to explore new career avenues and most of all, to acquire lifelong skills.

Join the Basel iii Compliance Professionals Association (BiiiCPA). Membership is Free
www.basel-iii-association.com/How_to_become_member.htm