Comptroller Curry says Final Rule Strengthens Capital While Minimizing Burden on Community Banks and Thrifts

WASHINGTON — Comptroller of the Currency Thomas J. Curry issued the following statement today regarding the interagency capital rule, which the Federal Reserve Board approved today. Mr. Curry said he intends to sign the rule next week.

In finalizing the new capital rules, the federal banking agencies are taking an important step to protect the banking system from future financial crises. I’m pleased that we were able to agree on a rulemaking that not only improves the quantity and quality of capital for banks of all sizes, but does so in a way that minimizes the burden on community banks. The final rule, which I intend to sign next week, incorporates a number of changes designed specifically to ease unnecessary burden on community banks and to respond to the many concerns we heard from them and others through our comment process while preserving the benefits to the financial system that come from higher quality and quantity of capital.

When we issued our proposals, one area that we highlighted for comment was whether the proposed treatment of Accumulated Other Comprehensive Income, or AOCI, would create unnecessary and harmful regulatory capital volatility for small banks and thrifts with holdings of available-for-sale (AFS) investment securities that are often in the form of Treasuries or other high-quality debt. We heard the concerns voiced by many small banks that the inclusion of unrealized gains and losses on AFS debt securities could result in large and volatile changes in capital levels that would be difficult and expensive for small banks to manage or hedge. The final rule gives these institutions an opportunity to opt out of this requirement, which I believe will prove very helpful for small institutions that buy securities as investments rather than as trading vehicles.

A second area of concern had been the treatment of residential mortgages. The proposed changes would have been disruptive for many small institutions, and so I’m very pleased that we agreed to continue to apply existing risk-based capital standards, including a 50 percent risk weight for prudently underwritten first-lien mortgages that are not past due.

A third area of concern involved the treatment of Trust Preferred Securities, or TRuPS. The proposed changes would have phased-out TruPS and cumulative perpetual preferred stock from Tier 1 capital. The final rule exempts small depository institution holding companies from this requirement. Subject to similar limits as in the current risk-based capital rules, capital instruments issued by these institutions prior to May 2010 that are currently in Tier 1 capital, including TruPS, are grandfathered.

Finally, we agreed that smaller institutions would have an extra year to implement these new requirements. For large internationally active banks subject to the advanced approaches provisions, the rule will be effective on January 1, 2014. Other institutions will begin applying the rules on January 1, 2015.

I think those are important accommodations, and it is entirely appropriate that they apply to the community banks and thrifts that had nothing to do with bringing on the crisis.

Still, there are a number of other provisions that will apply to all banks and thrifts, and that is also appropriate. The new rule calls for higher levels of capital and requires that banks and thrifts maintain higher levels of common equity as part of that capital. This Common Equity Tier 1 capital is better able to absorb losses than other forms of capital, and it will go a long way toward maintaining confidence in our banks during future periods of economic stress. In addition to the requirement for a 4.5 percent Common Equity Tier 1 capital ratio, banks and thrifts will be required to maintain a 2.5 percent capital buffer, also composed of Common Equity Tier 1. Institutions that fall below that level will be subject to increasingly stringent restrictions on their ability to pay dividends. Similarly, the final rule includes provisions that will strengthen capital requirements for areas that were a significant source of risk during the financial crisis, including securitizations and the calculations for counterparty exposures used by Advanced Approaches banks.

Getting to this final rule has not been an easy process. It required a lot of hard work on the part of many people at the three federal banking agencies, and it certainly benefitted from the significant input and effort provided by a multitude of commenters. But it has been worth it. These new capital standards will go a long way to shoring up the banking system against future financial shocks and shielding the American taxpayer from ever again having to rescue some of the largest financial institutions in times of economic stress.