Proposal aims to simplify capital rules; directors split on impact

Simplifying capital rules, particularly provisions related to “high volatility commercial real estate” (HVCRE) is the aim of a notice of proposed rulemaking issued by the Federal Deposit Insurance Corp. (FDIC) board Wednesday.

The notice was issued with a 60-day comment period; it was simultaneously issued by the Federal Reserve and the Office of the Comptroller of the Currency (OCC).

Meeting in open session, the board unanimously adopted the NPR on “Simplification to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) of 1996.” FDIC staff presenting the proposal to the board noted that the HVCRE issue was the single most commented-on provision of the agency’s capital rules during recent EGRPRA review.

“This proposal aims to strike a balance between reducing complexity on the one hand, and continuing to ensure appropriate capital requirements for banks’ construction lending activities on the other,” said FDIC Board Chairman Martin Gruenberg in a statement he delivered during the meeting. “We look forward to comments on how well we have struck this balance.”

Staff noted that, during the EGRPRA process, banking organizations had raised “concerns regarding the regulatory burden and complexity” associated with the regulatory capital rule. Commenters had requested that the agency simplify the capital rule for community banks, staff said.

In response, FDIC is proposing replacing the “current complex treatment” for certain acquisition, development and construction (ADC) loan exposures with a “simpler treatment.” Staff noted that the industry has commented that the definition of an HVCRE, in its current form, is “difficult to understand and inconsistently applied across the banking industry,” resulting in an inconsistent pricing of ADC loans.

The proposal replaces the HVCRE with a new exposure category called high volatility ADC. The change would be applicable to all banking organizations calculating their risk-rated assets under the standardized approach by “clearly defining the scope of loans that are considered higher risk and merit a higher risk rate,” FDIC staff said. “By simplifying the definition, the proposal seeks to reduce the amount of time banking organizations spend determining the appropriate capital treatment for their ADC portfolio,” staff told the board.

But Board Vice Chairman Thomas Hoenig said that the proposal is neither simpler nor less burdensome than the current rule.

“It is just different,” Hoenig said. “Different, but it still remains overly complicated and burdensome offering mostly technical adjustments. It falls well short of achieving the kind of simplification that would provide truly meaningful benefit to the industry, investors, and the public. Unfortunately, the proposed changes will only perpetuate the disparate capital benefits across banks of different sizes and provide only minimal regulatory reporting relief.”

In other comments, Gruenberg said that, to facilitate comment on the NPR (particularly by community banks), the agency is providing several tools to accompany the notice itself, including a summary of the NPR targeted to community banks and an estimator tool that will allow an FDIC-supervised bank to evaluate the potential impact of the proposal on the institution.

“We also are planning a national call with bankers to address their questions once the industry has had an opportunity to review the proposal.  We welcome comments on all aspects of the proposal,” he said.

Notice of proposed rule making: capital simplification

FDIC information on NPR, regulatory capital: proposed rule, community bank summary, estimator tool