Commenters mostly support pausing capital transition provisions

Commenters largely supported a joint proposal by federal banking agencies to pause Basel III capital transition provisions for financial institutions with less than $250 billion in assets, filed on Monday (Sept. 25).

With more than 200 letters filed – including 183 labeled as “community banker form letters” – the commenters mostly noted that the joint proposal from the Federal Deposit Insurance Corp. (FDIC), Federal Reserve and Office of the Comptroller of the Currency (OCC) would ease (or have no) burdens on banks.

Specifically, the proposal (jointly issued by the three agencies Aug. 25) would extend the Basel III transition provisions for treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interests by effectively pausing the phase-in of the regulatory capital deductions and risk weights regarding those items.

It applies to banking organizations that are not subject to the “advanced approaches capital rules” (non-advanced approaches banking organizations). The rules are a framework that requires certain banking organizations to use an internal ratings-based approach and other methodologies to calculate risk-based capital requirements for credit risk and advanced measurement approaches to calculate risk-based capital requirements for operational risk.

“In many cases, community banks have invested in these financial assets for many years, and they have performed well for the banks without any problems,” wrote Todd Borchardt of Choice Financial Group, in Langdon, N.D. “Restricting the ability of community banks to hold mortgage servicing assets results in them being retained by less regulated entities that may not provide the same level of care and diligence needed when maintaining a relationship with a borrower or other stakeholder. Equally important, mortgage servicing rights retained by community banks act as a natural hedge against rising interest rates and bring stability to earnings and asset valuations when interest rates rise rapidly.”

Banking trade groups likewise weighed in with support for the proposal. “We share the view that regulatory capital standards are more complex than necessary to achieve their prudential supervisory purpose, and we are pleased that the Agencies are considering simplification efforts,” wrote Hugh Carney of the American Bankers Association in Washington. “This is an appropriate time to consider the effectiveness of prudential supervision standards implemented in recent years, with a view toward simplifications and improvements that will not compromise safety and soundness.”

In a joint message, the Independent Community Bankers of America (ICBA) and Mortgage Bankers Association (MBA) noted the impact of the proposal on mortgage servicing assets. “The Basel III treatment of MSAs was intended to regulate large, systemically important financial institutions and the Banking Regulators have wisely decided to review and, per the NPR, possibly ‘simplify’ the treatment of MSAs for institutions below the $250 billion asset threshold for the advanced approaches in Basel III,” the two groups wrote. “This will provide crucial relief for mid-size and community banks that value MSAs for the consumer relationships that they foster.”

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