Pub. 2 2012-2013 Issue 4

18 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S Introduction The Federal banking agencies have recently adopted three separate “Notice of Proposed Rules” (NPRs) regarding proposed changes to leverage and risk-based capital requirements. Two of these NPRs (Basel III NPR and Standardized Approach NPR) would, if implemented, be applicable to all banks while the third (Advanced Approaches NPR) would generally only apply to very large institutions. Standardized Approach NPR This BFS Group executive summary covers some highlights of the Standardized ApproachNPR, whichwould have several af- fects on banks in Colorado. According to regulators, the purpose of the NPR is to revise rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses identified over recent years, including incorporating elements of the Basel II Standardized Approach. The proposed rule would: • Revise methods of calculating risk-weighted assets for certain on-and off-balance sheet items. • Propose alternatives to credit ratings for calculating risk- weighted assets for certain assets. • Allow for some potential substitution of financial collateral and eligible guarantors for calculating risk-weighted assets. Some of the elements (this is not an exhaustive list) of this NPR relevant to Colorado banks are as follows: 1-4 Family Residential Mortgages With some exceptions, the risk weights will generally in- crease from 1.5x up to 3x for 1-4 family residential mortgages. Exceptions will be for 30 year qualifying mortgages with ≤ 60% LTV, which would decrease from 50% to 30%, and for 30 year qualifying mortgages with ≤ 80% LTV, which would remain unchanged at 50%. “High Volatility” Commercial Real Estate The risk weight for “High Volatility” CRE, generally defined as acquisition, development, or construction financing, will increase from 100% to 150%. Exceptions include 1-4 family resi- dential properties and some other specified qualifying projects. Past Due Assets Having dealt with 1-4 family residential and High Volatility CRE, other assets that are ≥ 90 days past due or in nonaccrual status would see their riskweights increased to 150%. This would include revenue bonds, multifamily loans, consumer loans, com- mercial and industrial loans, non-farm non-residential loans, and agricultural loans. Structured Securities (such as Private Label MBS, TRUPs, ABS) The Ratings-Based Approach would be replaced with one of the following: a weighted average of underlying collateral, the Simplified Supervisory Formula Approach, or 1,250%. Certain other requirements will apply, such as consistent application of method and comprehensive due diligence. Equity Risk Weights Certain equity exposures in the 100% category will increase to various levels. Federal Reserve Bank stock and Federal Home Loan Bank stock will remain unchanged. Off-Balance Sheet Items, Collateralized Transactions and Eligible Guarantors Some off-balance sheet items will be impacted via credit con- version factors, different treatment for exclusions, and variedRBC weights. The risk weights for investment grade securities such as GOMunicipals, RevenueMunicipals, andCorporate bondswill be 20%, 50%and 100%, respectively. Under this proposal a bankmay be able to substitute the riskweight of an eligible guarantor for the risk weight of the exposure. An eligible guarantor is generally an entity that has investment grade debt, in addition to depository institutions, Federal Home Loan Banks, and Farmer Mac. Conclusion The Standardized Approach NPR is of great concern to all banks, particularly the great number of community banks across the country. These proposed rules will have far-reaching impli- cations for the entire banking industry. The current regulatory comment period has been extended to October 22, 2012. Banks are strongly encouraged to submit their comments to their re- spective regulators. Q Sources OCC, FDIC, Federal Register, ICBA, ABA BFS Group Executive Summary Standardized Approach NPR Analysis