Regulators Propose Basel III Delay

Mike Sorohan msorohan@mba.org

August 24, 2017

Yesterday, federal agencies issued a notice of proposed rulemaking that would pause Basel III implementation for certain assets, a development long advocated by the Mortgage Bankers Association.

The Federal Reserve Board, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. (https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170822a1.pdf) issued the NPR, which would delay Basel III implementation for certain assets, including mortgage servicing assets, for institutions with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposures.

The proposed delay comes as MBA has been vigorously advocating for such a pause in order to prevent community banks from being forced to sell servicing rights before the fully-phased in Basel III requirements became effective.

"It is important to note that this delay is being proposed in anticipation of another rule that would simplify the capital treatment of those assets," MBA said. "MBA has been consistently pushing lawmakers and regulators for such reform as a more reasonable long term solution to the capital treatment of MSAs. While the decision to delay the rule impacts community banks directly, the prospect of a reasonable long-term solution to the capital treatment of servicing rights is positive news for the MSR market and all mortgage banking companies."

In 2013, the agencies adopted rules designed to strengthen capital requirements applicable to banking organizations supervised by the agencies. The capital rules include limits on the amount of capital that would count toward these regulatory requirements in cases where the capital is issued by a consolidated subsidiary of a banking organization and not owned by the banking organization, known as minority interest. The rules were scheduled to go into effect Jan. 1.

However, the agencies noted since issuance of the capital rules in 2013, banking organizations and other members of the public have raised concerns regarding the regulatory burden, complexities and costs associated with certain aspects of the capital rules, particularly for community banking organizations.

"Consistent with that goal and in anticipation of the simplifications NPR, the agencies propose to extend certain transition provisions currently in the capital rules for banking organizations that are not advanced approaches banking organizations (non-advanced approaches banking organizations) while the simplifications NPR is pending," the agencies said. "As such, for non-advanced approaches banking organizations the transition provisions for certain items would not be fully phased in. The agencies will review the transition provisions again in connection with the simplifications NPR."

The agencies said under the transitions NPR, until the simplifications NPR is completed or the agencies otherwise determine, in accordance with Table 7 of section 300 of the capital rules, non-advanced approaches banking organizations would continue to:

--Deduct from regulatory capital 80 percent of the amount of any of these five items that is not includable in regulatory capital;

--Apply a 100 percent risk weight to any amounts of MSAs, temporary difference DTAs, and significant investments in the capital of unconsolidated financial institutions in the form of common stock that are not deducted from capital, and continue to apply the current risk weights under the capital rules to amounts of non-significant investments in the capital of unconsolidated financial institutions and significant investments in the capital of unconsolidated financial institutions not in the form of common stock that are not deducted from capital; and

--Include 20 percent of any common equity tier 1 minority interest, tier 1 minority interest and total capital minority interest exceeding the capital rule's minority interest limitations (surplus minority interest) in regulatory capital.

For example, the agencies said, under the transitions NPR, a non-advanced approaches banking organization with an amount of MSAs above the 10 percent common equity tier 1 capital deduction threshold in the capital rules would deduct from common equity tier 1 capital only 80 percent of the amount of MSAs above this threshold, and would apply a 100 percent risk weight to the MSAs that are not deducted from common equity tier 1 capital, including the MSAs that otherwise would have been deducted but for the transition provisions. Similarly, for purposes of the capital rules' 15 percent common equity tier 1 capital deduction threshold (the aggregate 15 percent threshold) that applies collectively across MSAs, temporary difference DTAs, and significant investments in the capital of unconsolidated financial institutions in the form of common stock, under the transitions NPR, a non-advanced approaches banking organization would deduct from common equity tier 1 capital 80 percent of the amount of these items that exceed the aggregate 15 percent threshold.

"Because the transitions NPR would not apply to advanced approaches banking organizations, such firms would be required to continue to apply the existing transition provisions in the capital rules," the agencies said. "Specifically, advanced approaches banking organizations would be required to apply, starting on January 1, 2018, the capital rules' fully phased-in regulatory capital treatment for MSAs, temporary difference DTAs, significant investments in the capital of unconsolidated financial institutions in the form of common stock, non-significant investments in the capital of unconsolidated financial institutions, significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock, and surplus minority interest."

"Working with its members, MBA will submit comments on the proposed rule and will work with the agencies on any proposals to adjust the treatment of MSAs under the regulatory capital rules," MBA said.

Comments are due 30 days after the proposed rule is published in the Federal Register.

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