Federal Reserve Issues Interim Rules Clarifying Basel III Reforms

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The Federal Reserve Board released two interim final rules clarifying in what way companies should include the Basel III regulatory reforms into their business and capital projections. Companies are expected to incorporate the Basel III regulatory reforms in their next capital plan submissions and stress tests.

Federal Reserve Issues Interim Rules Clarifying Basel III Reforms

Federal Reserve’s first interim final rule

The Federal Reserve explained the first interim final rule applies to bank holding companies with total consolidated assets of $50 billion or more. Banks are required to include the revised capital framework in their capital planning projections and stress test under the Dodd-Frank Wall Street Reform and Consumer Protection Act using the transition paths established in the Basel III final rule.

The first interim rule explained that the assessment of the capital adequacy of large banking organizations will continue against a minimum 5% tier 1 common ratio in the upcoming cycle. The manner of calculation will be similar to the previous stress tests and capital plan submissions to ensure consistency.

Second interim rule

The second interim rule provides a transition period of one year for banking organizations with $10 billion to $50 billion in total consolidated assets. These companies are each conducting their own stress tests implementing the Dodd-Frank Act.  Each bank is required to compute its stress test projections using the current capital regulatory rules to have enough time to adjust internal systems to the revised capital framework.

According to the Federal Reserve, the interim final rules will also shed light as to when a bank holding company must use advance approaches to compute minimum regulatory capital for a given capital plan and stress test cycle.

The Federal Reserve Board explained that that the interim final rule is consistent with its previous interpretation of the capital allocation plans and stress test rules. In addition, the Board said it ensures that the tier 1 common ratio is not flexible or less stringent than the ratio used in the previous cycles.

No burden from interim final rules

According to the Board, the interim final rules mandate that a bank holding company should receive a notice that it has completed its parallel run by September 30 every year in order to be required to estimate its capital ratios using the advanced approaches for its capital plan or stress test in a particular year. The interim final rule should not pose any incremental burden on firms.

The United States finalized the rules implementing the Basel III capital reforms in July, which will take effect next year or by 2015 depending on the size of a bank.

According to the Federal Reserve, the next capital planning and stress test cycle will start on October 1st. The schedule overlaps the implementation of the Basel III capital reforms.

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