• Home
  • Executive Benefits
    • Supplemental Executive Retirement Plans – SERP
    • Split Dollar Loans
    • Deferral Plans
    • Welfare Plans
  • Revenue Strategies
    • Bank/Business Owned Life Insurance – BOLI
    • Corporate Owned Life Insurance – COLI
    • Insurance Company Owned Life Insurance
    • Managed Accounts
    • Guaranteed Income Contracts
    • Fee Income Strategies
  • Asset Protection
    • Estate Planning
    • Business Succession Planning
    • Key Person Planning
  • About
    • R. Scott Richardson, JD
    • Brenda R. Haag
    • Bruce F. Barge
    • Chris A. Richardson
    • Debra Hardimon
    • Fannie Mae Pantaleon
    • Gary Wilberg
    • Jeff Prescher
    • Joe Tripalin
    • Patrick J. Costello
    • Philip Aderton
  • Resources
    • Blog
    • Events >
      • 2019 Client Conference
      • History – Calendars by Year >
        • 2017 Client Conference
        • 2015 Client Conference
    • Video Education
  • Contact
  • Home
  • Executive Benefits
    • Supplemental Executive Retirement Plans – SERP
    • Split Dollar Loans
    • Deferral Plans
    • Welfare Plans
  • Revenue Strategies
    • Bank/Business Owned Life Insurance – BOLI
    • Corporate Owned Life Insurance – COLI
    • Insurance Company Owned Life Insurance
    • Managed Accounts
    • Guaranteed Income Contracts
    • Fee Income Strategies
  • Asset Protection
    • Estate Planning
    • Business Succession Planning
    • Key Person Planning
  • About
    • R. Scott Richardson, JD
    • Brenda R. Haag
    • Bruce F. Barge
    • Chris A. Richardson
    • Debra Hardimon
    • Fannie Mae Pantaleon
    • Gary Wilberg
    • Jeff Prescher
    • Joe Tripalin
    • Patrick J. Costello
    • Philip Aderton
  • Resources
    • Blog
    • Events >
      • 2019 Client Conference
      • History – Calendars by Year >
        • 2017 Client Conference
        • 2015 Client Conference
    • Video Education
  • Contact
IZALE Financial Group

Blog

Basel III In Bite-Sized Pieces - Part III

12/15/2013

0 Comments

 
Key Elements Of The New Capital Rules

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency adopted the much anticipated new capital rules implementing Basel III. The new rules will become effective for community banks on January 1, 2015, with many provisions of the new rules phasing-in over a four-year period. This series will discuss the following:
  • Part I. Overview | Entities Affected By The New Capital Rules (July 31, 2013)
  • Part II. Changes To The Minimum Capital Requirements (August 13, 2013)
  • Part III. Revised Regulatory Capital Calculation
  • Part IV. Changes To The Risk-Weighting Of Assets
  • Part V. The Impact Of The Capital Conservation Buffer

Steps You Can Take To Prepare For The Revised Regulatory Capital Calculation

  • Implement a review of your current regulatory capital to determine whether it is adequate under the new rules
  • Review your current assets and holdings to determine whether they will need to be deducted from regulatory capital
Part III. Revised Regulatory Capital Calculation

The new capital rules emphasize the importance of capital and, consequently, increase the amount of capital that a banking organization must maintain.

Part II of this series focused on the increase in the capital ratios and the implementation of a new Common Equity Tier 1 (“CET1”) capital ratio. This Part III will discuss how the new capital rules further increase the capital requirements by limiting what qualifies as regulatory capital. Because the new minimum capital ratios are calculated by dividing capital by assets, understanding the new capital requirements requires an understanding of these revised capital definitions, including CET1.

Because this series is only a summary of these issues, we encourage you to contact us directly with any questions.

Common Equity Tier 1

Generally speaking, CET1 consists of: (i) outstanding common stock and related surplus (net of treasury stock); (ii) retained earnings; (iii) certain qualifying capital instruments issued by consolidated subsidiaries; and (iv) accumulated other comprehensive income (“AOCI”). Although AOCI is included in the calculation of CET1, bank holding companies with less than $250 billion in assets are allowed a one-time option to filter AOCI from their regulatory capital. This AOCI opt-out must be made on the organization’s first Call Report, FR Y-9C or FR Y-9SP, as applicable, filed after January 1, 2015.

Point Of Interest:

After a merger between two banking organizations that made different AOCI elections, the surviving entity must decide whether to make the AOCI opt-out by its first regulatory reporting date following the merger.

In addition, capital instruments equivalent to common stock (in terms of subordination and availability to absorb losses), which do not possess features that could cause a banking organization to weaken during periods of market stress, may also be considered CET1 capital.

Point Of Interest:

Shares of common stock issued under an ESOP by a banking organization that is not publicly traded also count as CET1.

Additional Tier 1 Capital

In addition to CET1, a banking organization can include in Tier 1 capital certain instruments that are “available to absorb losses” on a going-concern basis. To qualify for this category, the capital instrument must, among other criteria: (i) be issued and paid-in, with the paid-in amount classified as equity under GAAP; (ii) be subordinated to depositors, general creditors and subordinated debt holders; (iii) be unsecured and not guaranteed by the organization or an affiliate of the organization; (iv) have no maturity date, dividend step-up or other inducement to redeem; (v) be callable only after a minimum of five years, with certain exceptions; (vi) have the ability to cancel dividends or capital distributions without default; (vii) not be credit-sensitive; (viii) not be purchased or directly or indirectly funded by the organization or an entity controlled by the organization; and (ix) not have a feature that limits or discourages additional capital issuances. Consequently, Tier 1 capital instruments are generally limited to non-cumulative perpetual preferred stock and certain qualified minority interests in capital instruments that qualify as Tier 1.

Point Of Interest:
  • Newly issued trust preferred securities and cumulative perpetual preferred stock no longer qualify as Tier 1 capital.
  • Bank holding companies with less than $15 billion in assets may still include in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock issued prior to May 19, 2010, provided that such instruments do not make up more than 25% of total Tier 1 capital.
     
Tier 2 Capital

Tier 2 capital consists of: (i) certain capital instruments that qualify as Tier 2 capital and their related surplus; (ii) minority interests that are not included as Tier 1 capital; and (iii) the amount of an organization’s allowance for loan and lease losses that does not exceed 1.25% of the organization’s standardized risk-weighted assets. Tier 2 capital instruments are restricted to instruments that, among other things, are paid-in, unsecured and subordinated to depositors and general creditors and have maturities of at least five years. Practically speaking, the majority of Tier 2 capital instruments will be subordinated debt, subject to certain restrictions, and any trust preferred securities and cumulative perpetual preferred stock that do not otherwise qualify as Tier 1 capital.

Minority Interests In Consolidated Subsidiaries

In certain circumstances and subject to various restrictions and quantitative limits, a parent company may be able to count a limited amount of capital issued by a consolidated subsidiary to third-parties (a “minority interest”) as part of the parent company’s consolidated regulatory capital. A minority interest may only be counted toward a parent company’s capital if the minority interest satisfies all criteria that would apply for the capital category (CET1, Tier 1 or Tier 2) if the parent company had issued the capital itself.

To count a minority interest as CET1 of the parent company, (i) the consolidated subsidiary issuing the capital instrument must be a bank, and (ii) the capital instrument must otherwise qualify as CET1. A capital instrument issued by a bank or non-bank consolidated subsidiary may qualify as:

  • Tier 1 capital of the parent if the capital issued by the subsidiary:
    • satisfies the criteria for Tier 1 capital, or
    • satisfies the criteria for CET1 and the subsidiary is not a bank; or
  • Tier 2 capital of the parent if the capital issued by the subsidiary satisfies the criteria for Tier 2 capital.

In addition to the qualitative restrictions on minority interests, the new capital rules contain a complex methodology designed to limit the amount of minority interests that may be included in the consolidated capital of a banking organization. The rules governing the capital treatment of minority interests of consolidated subsidiaries and the applicable quantitative limits are extremely complex and subject to various carve-outs and exceptions.

General Deductions From Regulatory Capital

A banking organization is required, under the new capital rules, to deduct from its CET1 capital the following: (i) goodwill and other intangibles, other than mortgage servicing assets (“MSAs” which are addressed below), net of associated deferred tax losses (“DTLs”); (ii) after-tax gain-on-sale associated with a security exposure (i.e., an increase in equity capital as a result of a securitization); (iii) pension fund assets net of associated DTLs; and (iv), in the case of advanced approaches banking organizations (i.e., a bank holding company with more than $250 billion in assets or that satisfies certain other criteria), any expected credit loss that exceeds the banking organization’s eligible credit reserves. In addition, banks are required to deduct any investment in a financial subsidiary from their CET1. These deductions will be phased-in beginning in 2015 and will be fully phased-in by 2018. However, the final rules do not include a transition period for the deduction of goodwill.

A banking organization also is required to deduct from CET1 any of the following that (a) exceed 10% of the organization’s CET1 individually; or (b) exceed, in the aggregate (after taking into account any deductions made as a result of the 10% deduction threshold), 15% of an organization’s CET1: (i) deferred tax assets (“DTAs”) that could not be realized through net operating loss carrybacks (net of related valuation allowances and DTLs); (ii) MSAs net of associated DTLs; and (iii) certain investments in the capital of unconsolidated financial institutions. These deductions will be phased-in beginning in 2015 and will be fully phased-in by 2018.

Deductions For Deferred Tax Assets And Mortgage Servicing Assets

The deductions relating to DTAs and MSAs are conceptually straightforward, although the details are highly technical. If an organization has DTAs or MSAs and those DTAs or MSAs, after deducting DTLs, individually exceed 10% of the organization’s CET1, then the organization must deduct any amount that exceeds the 10% CET1 threshold directly from the organization’s CET1.

Point Of Interest:

The inclusion of MSAs in regulatory capital is no longer limited to 90% of fair value. Instead, the new capital rules require a deduction from an organization’s CET1 of any MSAs that exceed 10% of CET1 individually or 15% in the aggregate.

Deductions For Investments In Unconsolidated Financial Institutions

Deductions relating to the investment in capital of unconsolidated financial institutions are more difficult to calculate and vary depending on whether the investment is significant or non-significant. A significant investment is an investment in more than 10% of the unconsolidated financial institution’s common equity. If an organization has a significant investment in common equity, then any other capital investment in the unconsolidated subsidiary also is significant. A non-significant investment, on the other hand, is any investment in the capital of an unconsolidated financial institution when the banking organization owns less than 10% of the common equity of the financial institution.

A non-significant investment that is less than 10% of a banking organization’s CET1 does not need to be deducted from an organization’s regulatory capital. However, a non-significant investment that exceeds 10% of the organization’s CET1 must be deducted from an organization’s regulatory capital using the “corresponding deduction approach.” The corresponding deduction approach requires that the investment be deducted from the organization’s corresponding capital component. Thus, if a banking organization has an investment in the capital instruments of an unconsolidated financial institution that would qualify as Tier 2 capital of the banking organization, then the investment amount exceeding the 10% threshold must be deducted from the organization’s Tier 2 capital. However, if the organization does not have sufficient Tier 2 capital for the deduction, then the shortfall must be deducted from the next highest regulatory capital component, which in this case would be Tier 1.

A significant investment is treated in a similar fashion. If a banking organization holds 10% or more of the common equity of an unconsolidated financial institution, then the organization must deduct any amounts exceeding 10% of the organization’s CET1 from the organization’s CET1. If – in addition to holding 10% or more of an unconsolidated financial institution’s common equity – the banking organization holds any other capital instruments of the unconsolidated financial institution, then the full amount of the organization’s holdings in that capital instrument must also be deducted from the organization’s regulatory capital using the corresponding deduction approach. Consequently, if a banking organization owns 10% of the common equity of an unconsolidated financial institution and 5% of such institution’s non-cumulative perpetual preferred stock, the banking organization must deduct the common equity that exceeds 10% of the organization’s CET1 from the organization’s CET1 and the full 5% of its holdings in the institution’s non-cumulative perpetual preferred stock from its Tier 1 capital.

Aggregate Deductions To Regulatory Capital

Finally, under the new rules, the aggregate amount of the items subject to the 10% threshold deduction that are not deducted from a banking organization’s CET1 may not exceed 15% of the organization’s CET1. This calculation does not include any amounts already deducted for exceeding the 10% threshold discussed above. The 15% threshold is thus calculated by aggregating the banking organization’s MSAs, DTAs and significant investments that are below the 10% threshold. If the aggregate of such amounts exceeds 15% of the organization’s CET1, then such amounts also must be deducted from a banking organization’s CET1.

Point Of Interest:

A banking organization must deduct from its capital any DTAs, MSAs or investments in unconsolidated financial institutions that exceed 10% individually or 15% in the aggregate of the organization’s CET1.

Resources

As with any new rule-making, implementation of the required changes and thorough planning for the impact of new concepts will take time. We urge you to begin the process of understanding how these rules will impact your organization as soon as possible. To aid in this understanding, we have provided links to Parts I and II of our series, Basel III in Bite-Sized Pieces, and the following useful regulatory guidance for community banks:

Barack Ferrazzano Materials

  • Basel III in Bite-Sized Pieces: Part I - Changes To The Minimum Capital Requirements (July 31, 2013)
    • http://www.bfkn.com/fig_201307ca_baseliiiparti
  • Basel III in Bite-Sized Pieces: Part II - Changes To The Minimum Capital Requirements (August 13, 2013)
    • http://www.bfkn.com/fig_201307ca_baseliiiparti

Regulatory Materials


  • Interagency New Capital Rule Community Bank Guide
    • http://www.federalreserve.gov/bankinforeg/basel/files/capital_rule_community_bank_guide_20130709.pdf
  • OCC New Capital Rule Quick Reference Guide for Community Banks
    • http://www.occ.gov/news-issuances/news- releases/2013/2013-110c.pdf
  • Expanded Community Bank Guide to the New Capital Rule for FDIC-Supervised Banks
    • http://www.fdic.gov/regulations/capital/Community_Bank_Guide_Expanded.pdf
Please feel free to contact us with any questions concerning the new capital rules or any other issues.

0 Comments

Your comment will be posted after it is approved.


Leave a Reply.

    IZALE Financial Group

    As an independent firm, we’re driven by close client relationships. For you, that means that our technical expertise is yours to rely on. 

    RSS Feed

    View my profile on LinkedIn

    Archives

    September 2018
    August 2018
    May 2018
    April 2018
    March 2018
    November 2017
    September 2017
    August 2017
    April 2017
    March 2017
    January 2017
    December 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    March 2015
    August 2014
    July 2014
    June 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013


    Categories

    All
    1035 Tax Deferred Exchange
    2018
    401K
    457f Plans
    AALU
    Articles
    Asset Man
    Asset Management
    Asset Protection
    BalancedComp
    Bank
    Banking
    Bank Owned Life Insurance
    Bankruptcy
    Banks
    Basel III
    Beneficiary
    Benefit Plans
    Benefits
    Board Of Directors
    BOL
    BOLI
    Brian Smedley
    Bruce Barge
    Business Owned Life Insurance
    Capital Conservation Buffer
    Capital Management
    Capital Requirements
    CBAI
    CDI
    CEO
    CFO
    Chris
    Chris Richardson
    Clawback
    Cole Frago
    COLI
    Common Equity
    Commuity Bank Of Trenton
    Community Banking
    Community Banks
    Compensation
    Connecticut Court
    Consumer Protection Act
    Consumer Protection Act Of 2010
    Corporate Owned Life Insurance
    Corporate Taxation
    CPA
    Credit Rates
    Credit Union
    Credit Union Magazine
    Credit Union National Association
    Credit Unions
    CUES
    CUNA
    DBO
    Death Benefits
    Divorce
    Dodd Frank Wall Street Reform
    Dodd-Frank Wall Street Reform
    Econocheck
    Economic Forecast
    Employee Benefits
    ERISA
    Estate Planning
    Estate Tax
    Estate Trust
    Executive Benefits
    Executive Compensation
    Executive Retirement Plans
    Family Legacy
    FDIC
    Fee-based Checking
    Fee Checking
    Fee Income Strategies
    FICA
    Finance Industry
    Financial Education
    Financial Executives
    Financial Managers Society
    Financial Planning
    Finanical Reporting
    Fintect
    Fiscal Year 2015
    Fixed Income
    FL
    FMS
    Fmstv
    FRS
    Gary Wilberg
    Gerald H. Sherman
    Gift Tax
    Greenberg Traurig
    Greene V. Commissioner
    Guggenheim Partners
    House Ways And Means
    IDProtect
    Incentive Based Compensation
    Incentive-based Compensation
    Income Tax
    Inherit
    Inheritance
    In-Laws
    Insurance
    Insurance Premium
    Insurance Tax Liability
    Investment Portfolio
    Investments
    IRA
    IRC
    Irrevocable Trust
    IRS
    IZALE
    IZALE Financial Group
    IZALE Testimonial
    JB Barnes
    Jobs Act 2017
    Joe Tripalin
    Jonathan Barnes
    Jonathan M. Forster
    Ken Kies
    Key Person Life Policy
    Las Vegas
    Leadership
    Legacy Planning
    Life Insurance
    Life Policy
    LLP
    Martin Kalb
    Matt Bush
    Media
    National Credit Union Administration
    NCUA
    Non-interest Income
    Non-profit
    Nonqualified Deferred Compensation
    Nonqualified Plans
    Obama Administration
    Orlando
    Pay Ratio Rule
    Phil Aderton
    Philip Aderton
    Premarital Planning
    President Obama
    President's Budget
    Press
    Press Releases
    Profit Sharing
    PRS
    Rebecca Manicone
    Regulationry Issues
    Regulatory Capital Calculation
    Regulatory Environments
    Resources
    Retirement
    Retirement Plan
    Revenue Strategies
    Richard A. Sirus
    Risk Management
    Roth
    R. Scott Richardson
    SBLI Term Life Insurance
    Scott Richardson
    SEC
    Secure Checking
    SERP
    Small Business Resale
    Social Security Tax
    Split Dollar Plans
    Steve Brown
    Steve Fichtenbaum
    Steven B. Lapidus
    Stock Exchange
    Stuart Lewis
    Tax Benefit
    Tax Code
    Tax Court
    Tax Cuts
    Tax Cuts And Jobs Act Of 2017
    Tax Deductions
    Tax Deferred Assets
    Tax Incentives
    Tax Law
    Tax Liabilities
    Tax Planning
    Tax Refor
    Tax Reform
    TCJA 2017
    The Forum
    Trust
    Trustee
    Trusts
    US Supreme Court
    Washington Report
    Webinars
    Webinar W.O.W.S.
    WRMarketplace
    WRNewswire

Client Log-In

Log in to Pangburn
Log in to RBOLI.com

Contact

 855-492-5334 | Contact
Join Our Mailing List
© 2011 - 2019 IZALE Financial Group. All rights reserved. Login.
​Effective June 9, 2017, all individuals who provide advice to retirement plans, including Individual Retirement Accounts (IRAs), must abide by the fiduciary standard.  What does the fiduciary standard mean?  This means that your advisor must put your interests first before their own or that of the firm, make prudent recommendations, charge reasonable compensation and make no misrepresentations to you regarding recommended investments.  The recommendations made by your advisor must be based upon your specific investment needs and objectives.  The fiduciary standard is applicable to any recommendations that your advisor makes to you, the client, for your retirement account. 

Please note the firm does have policies and procedures in place to monitor this level of fiduciary responsibility for our clients.
IZALE Financial Group does insurance business in California as IZALE LLC Insurance Agency
This site is published for residents of the United States only. Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every advisor listed. For additional information, please contact Scott Richardson at 855-492-5334 .