The final Basel III rules for US banks were issued by the bank regulators in July, 2013. These rules require all banks to maintain higher capital levels, and generally add complexity to the US regulatory capital framework. All banks will need to strategically manage to the higher capital levels.

Implementation of the new rules for Community and most other banks and bank holding companies begins January 1, 2015. Implementation for "Advanced Approaches" Banking organizations, which include all banks and bank holding Companies with $250 billion or more in consolidated assets or $10 billion or more of on-balance sheet foreign exposure, begins January 1, 2014. For all banks, there are detailed phase-in requirements in the implementation framework that need to be considered in planning and analyzing Basel III implementation.

The Final Basel III rules a) significantly increase required minimum capital ratios, b) introduce a new common equity ratio, c) create the concept of "capital buffers," d) narrow what is permitted as capital and e) change the risk based assets calculation. The new common equity ratio is called "Common Equity Tier 1" or "CET1". The minimum "CET1" ratio for Non-Advanced Approaches banking institutions, which include Community Banks, increases from 4.5% at January 1, 2015 to 7.0% at January 1, 2019. This calculation includes a "capital conservation buffer" which is added to the minimum ratio of CET1 to risk weighted assets of 4.5%, and is phased in from 0.0% in 2015 to 2.5% in 2019, resulting in an effective CET1 to risk weighted asset ratio of at least 7.0% in 2019.

CET1 is defined by reference to 13 criteria, but is essentially common equity with limitations on distributions. Tier 1 Capital is defined by 14 criteria, with the most common qualifying Tier 1 instrument being noncumulative perpetual preferred stock. Tier 2 Capital is defined by reference to 11 criteria, with the principal criteria being subordination to depositors and general creditors, original maturity of at least 5 years, and no credit-sensitive features. There are special rules and some phase outs for Trust Preferred Securities.

Computations for the capital ratio denominator (risk adjusted assets) are equally complex, with special rules for residential mortgages, commercial estate, corporate exposures, and securitizations.

The following are links to useful publications and analysis available from regulators and industry participants.

OCC Community Bank Guide:

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Eric Segal 

Managing Director

esegal@cfoconsultingpartners.com