The Federal Deposit Insurance Corp introduced a series of proposals this week aiming to align new Basel capital standards for banks and FDIC insurance assessments.
The proposals would revise the way the FDIC calculates payments required for the agency fund designed to protect depositors against bank failures.
The FDIC takes into account institutions’ capital levels when determining insurance premiums. Under the new proposals all banks would be required to take a standardized approach when measuring capital and calculating counterparty risk. This type of risk in particular, is factored into the FDIC’s rate assessment for nine highly complex banks. Under Basel III capital rules, these complex banks are granted some greater flexibility in assessing counterparty exposure, which often result in lower premiums. The new proposal requiring a standardized approach could result in higher premiums for these institutions. Other smaller banks would not see any changes in premiums from the proposed changes.
FDIC chief Martin Gruenberg was quoted in a meeting of the FDIC board this week saying,
"It's important that the capital categories that we use for deposit insurance assessments appropriately reflect the changes in the capital rules to maintain consistency in risk measurement and not increase reporting burden for smaller banks."
This change is necessary, according to the FDIC, in order to avoid two sets of capital ratios from being reported. The proposals will remain open for 60 days of public comment. If approved, all changes would go into effect in the first quarter of 2015.
This aspect of the proposals is part of overall efforts by the FDIC to align general risk categories used to price assessments with changes outlined in Basel III final rules. Under these categories, “well-capitalized” banks are charged more favorable rates. A new leverage ratio approved by the FDIC earlier this year will go into effect Jan. 2018 requiring a minimum 6% leverage ratio in order to be well capitalized and a 3% leverage ratio to be considered adequately capitalized.
Federal agencies are calling for comments on a series of proposed revisions to the Call Report that would incorporate the standardized approach for calculating risk-weighted assets under revised regulatory capital rules approved last year.
The Federal Deposit Insurance Corporation, the Federal Reserve Board and the Office of the Comptroller of the Currency, under the auspices of the Federal Financial Institutions Examination Council are requesting comment on the proposed revisions, which are consistent with the agencies’ revised regulatory capital rules.
The proposed changes would replace the existing Part II, risk-weighted assets of Schedule RC-R with a revised version of Part II that incorporates a more standardized calculation approach. In addition, the proposal also calls for a revision of the reporting of securities borrowed in Call Report Schedule RC-L, derivatives and off-balance sheet Items. If approved, all changes would take effect March 31, 2015.
Currently, institutions use Schedule RC-R, Part II, to collect data on the allocation by risk-weight category of balance sheet asset amounts and credit equivalent amounts of derivatives and off-balance sheet items, according to the FDIC. Then, risk-weighted assets are calculated and reported according to risk-weighted category, standardized market risk weighted assets and total risk-weighted assets.
In order to align Part II of Schedule RC-R with revised regulatory capital rules, the proposal calls for a greater number of risk-weight categories to which balance sheet assets, derivatives and off-balance-sheet items would be allocated. The new risk-weighted categories apply only in limited circumstances, as opposed to applying to each category of assets, derivatives and off-balance-sheet items. For example, greater detail would be collected on held-for-sale and held-for-investment loans and leases than in the current version of the schedule. Each type of loan and lease exposure would then be reported and allocated by risk-weight category.
In addition, proposed revised Part II of the schedule also includes separate items for reporting on-and off-balance sheet securitization exposures. For the section of the schedule covering derivatives and off-balance sheet items, the revisions aim to convey data on the face value or notional amount of, credit equivalent amount of; and risk-weight category allocations for all rep-style transactions; as well as all unused commitments maturing one year or less. Additionally, institutions would have to report separately the amount of unconditionally cancelable commitments; the credit equivalent amounts and risk-weight category allocations of over-the-counter and centrally cleared derivatives; as well as the remaining maturities of over-the-counter and centrally cleared derivatives, according to underlying risk exposure.
Institutions would still report risk-weighted asset totals in the same process as before using the revised version of Part II. The full summary of proposed changes to Call Report Schedule RC-R, Part II and Schedule RC-L can be read here.
Current revisions to another section of Schedule RC-R – regulatory capital components and ratios – began phasing in as of March 2014. These changes are to be completed by all institutions by March 31, 2015. The changes provide a more detailed breakdown of the components of regulatory capital, including deductions and adjustments than the previous Part I.A.
Drafts of the proposed reporting form can be found on the FFIEC’s website. Comments can be sent to any or all of the agencies. All comments must be submitted by Aug. 22, 2014.
Bank of America will have to suspend its capital plans, the Federal Reserve announced, following a recent disclosure the banking institution incorrectly reported data used in the calculation of regulatory capital ratios. Those ratios were submitted as inputs in a stress test conducted by the Federal Reserve. The board announced Monday it would suspend planned increases in BoA’s capital distributions and the corporation would be required to resubmit its capital plan.
Following the announcement Monday, Bank of America’s stock dipped 6.3%, making it the lowest one-day dive since 2012, according to the Wall Street Journal. BAC experienced a total market value loss of about $10 billion, according to CNN Money.
When Bank of America prepared its quarterly report, “incorrect adjustments” related to its 2009 acquisition of Merill Lynch & Co., Inc. were found, according to the company. Previously, the company included estimated preliminary Basel III capital amounts and ratios as well as Basel 1 capital amounts and ratios for 2013. When the release was issued, “the bank incorrectly adjusted for cumulative realized losses on Merrill Lynch issued structured notes that had matured or were redeemed by the company subsequent to the date of the Merill Lynch acquisition.” As a result, BoA announced a downward revision to the company’s previously disclosed regulatory capital amounts and ratios.
Under orders from the Federal Reserve, Bank of America must suspend its plans to buy back $4 billion of common stock and increase its dividend from 1 cent a share to 5 cents. The planned dividend boost would have been the first made by BoA since the financial crisis. Under the new capital plan, BoA warned these capital actions would likely be less than announced before.
Bank of America’s new capital plan must address the errors in its regulatory capital calculations and also must undertake a review of its regulatory capital reporting to ensure no future errors are made. The plan must be resubmitted within 30 days, according to the Federal Reserve. BoA will not be able to increase its capital distributions – including those approved during the initial stress test – until the Federal Reserve officially confirms the accuracy of the new capital plan. The bank said it would engage a third party to review processes and materials prior to resubmission.
Anytime a bank that is part of the Federal Reserve’s Comprehensive Capital Analysis and Review program has a material change that could potentially lead to an alteration in a firm’s capital position, the reserve has the power to require the organization to resubmit its capital plan.
Bank of America’s error serves as a reminder to all banking institutions - big and small - the dangers of inaccurate reporting. In order for banks to prevent financial setbacks and a tarnished reputation it is critical to implement a sound process that embraces controlled reporting of all capital to regulatory agencies.