Banking agencies ready to finalize simplified compliance for community banks with certain aspects of the capital rule

Community banks and “non-advanced approaches banking organizations” will be subject to simpler regulatory capital requirements for mortgage servicing assets, certain deferred tax assets arising from temporary differences, and investments in the capital of unconsolidated financial institutions than those currently applied under a rule expected to be made final as early as Tuesday by federal banking regulators.

The new rule would take effect April 1, 2020; it was approved in a notation vote by the Federal Deposit Insurance Corp. (FDIC) Board May 28. The Federal Reserve and the Office of the Comptroller of the Currency (OCC) are expected to also approve the final rule.

According to the Independent Community Bankers of America (ICBA), under the rule community banks would only have to deduct from their capital mortgage servicing assets (MSAs), temporary difference deferred tax assets (DTAs), and investments in the capital of unconsolidated financial institutions if they individually exceed 25% of common equity tier 1 capital of the bank.

In a notice to be published in the Federal Register, the three federal banking agencies will finalize the rule that was proposed nearly two years ago. In October 2017, the agencies issued the proposal that they said, at the time, followed up on a commitment the three banking agencies made to Congress earlier that year to “meaningfully reduce regulatory burden, especially on community banking organizations.” The commitment was made in the agencies’ report to Congress in March mandated by the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA).

Specifically, the agencies then proposed that non-advanced approaches banking organizations (generally, those with less than $250 billion in assets) apply a simpler regulatory capital treatment for MSAs; certain DTAs arising from temporary differences; investments in the capital of unconsolidated financial institutions; and capital issued by a consolidated subsidiary of a banking organization and held by third parties (minority interest).

More generally, the notice stated, the proposal also included revisions to the treatment of certain acquisition, development, or construction exposures that are designed to address comments regarding the current definition of high volatility commercial real estate exposure (HVCRE) under the capital rule’s standardized approach.

Regulatory Capital Rule: Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996