U.S. regulators seek pause to capital rules for small banks, but many have adjusted

NEW YORK (Thomson Reuters Regulatory Intelligence) - U.S. bank regulatory agencies hit the pause button on August 22 with a proposal to delay the implementation period(here) for stricter capital rules for smaller banks while they review ways to simplify requirements.

A U.S. Dollar note is seen in this June 22, 2017 illustration photo.

The proposal would allow banks with less than $250 billion in assets and less than $10 billion in foreign exposure – typically those that do not use the Basel II advanced capital approaches - to keep operating under more lenient capital rules beyond the beginning of 2018. The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp made the proposal jointly. The impact of the move may be small, according to an industry-group representative, but there were also calls among regulators for more relief.

The proposal, if adopted after a 30-day comment period, would mean that these banks would continue:

--Deducting less investment in the capital of unconsolidated financial institutions, mortgage servicing assets (MSAs), and temporary difference deferred tax assets (DTAs) from common equity tier 1 capital; and

--Using a 100 percent risk weight for non-deducted MSAs, temporary difference DTAs and significant investments in the capital of unconsolidated financial institutions, rather than the 250 percent risk weight scheduled to take effect by next year.

Large banks would still face stricter capital requirements, beginning on Jan. 1, 2018.


The Independent Community Bankers of America, which represents small banks, applauded the regulatory relief effort(here). Nevertheless, Chris Cole, the organization's executive vice president, told Thomson Reuters the extension would have only a "marginally positive impact" for most of the small banks.

About 10 percent of the organization’s members currently carry MSAs on their balance sheets, much fewer than in 2013 when regulators started applying capital rules on small banks, Cole said. “It would have been more meaningful if the rules were simplified years ago,” he said.

The agencies’ independent impact analyses agree that the proposed rule would:

--Have a negligible cumulative impact on capital levels (about 90 percent of which would accrue from keeping the risk-weights on non-deducted MSA and DTAs constant);

--Not impact the recordkeeping and reporting requirements that affect small banking organizations are currently subjected to.


Small bank advocacy groups had long been contending that a one-size-fits-all approach to elements of bank regulation under the Dodd-Frank Act has hit the community banks disproportionately heavily in areas such as capital, and that their scant staff resources are stretched in coping with the expense of compliance, form-completion and additional record keeping.

For example, an annual survey of 159 banks released in March this year by the American Banker Association found that compliance costs related only to mortgages have increased for 97 percent as a result of recent regulatory reforms, and 75 percent have had to hire additional staff to cope with new regulations.

Meanwhile, regulators have taken steps to lighten the regulatory load and simplify capital rules for smaller banks on various occasions. Such steps are in line with the deregulation agenda of President Donald Trump’s administration. Now-Treasury Secretary Stephen Mnuchin showed his aims as early as January, when he told his Senate confirmation hearing, “regulation is killing community banks.”

In March, the regulators announced that they would launch an effort to ease regulations for smaller institutions, as part of a mandatory requirement to review all existing rules every 10 years. Simplifying capital rules for community banks was identified as a priority following that review, but regulators have not said when they would release those new rules.

Most recently, a Treasury report that came out in June recognized that “community financial institutions’ business models have come under pressure from added compliance costs from new regulations.” It urged regulators to “explore exempting community banks from the risk-based capital regime implementing the Basel III standards.”

The report advocated tailoring capital regulations to better reflect the risk profile of community banks to alleviate the burden of Basel III capital requirements, as well as to free small banks from the complex rules used to calculate common equity, and the requirement to hold higher capital on specific asset classes due to the introduction of higher risk-weights.


While the direct relief provided by the proposed extension may be small for the affected banks, the pressure is on for more regulatory relief.

FDIC vice chairman Thomas Hoenig urged regulators to go even further in easing rules for less complicated banks. “Community banks engaging in traditional activities deserve meaningful relief from risk-based capital rules,” he said in a statement.

(This article includes material from Reuters.)

(Bora Yagiz, FRM is a New York-based Regulatory Intelligence Expert for Thomson Reuters Regulatory Intelligence, specializing in risk. He is a certified Financial Risk Manager. Mr. Yagiz has held positions as a bank examiner for the Federal Reserve Bank of New York, as senior consultant with Ernst & Young and vice president at Morgan Stanley. Follow Bora on Twitter @Bora_Yagiz. Email Bora at