WASHINGTON — The federal banking agencies proposed simplifying aspects of the risk-based capital rules, particularly for community banks, but some industry representatives and regulators themselves were skeptical the proposal went far enough.

The simplifications were put forward as part of the Economic Growth and Regulatory Paperwork Reduction Act, which requires regulators to consider ways to ease the regulatory burden based on industry feedback.

Under the capital proposal unveiled Wednesday, most of the proposed changes would apply to banks with under $250 billion in assets and less than $10 billion in total foreign exposure, which do not follow the "advanced approaches" to capital rules. Some revisions to treatment of certain construction loans would apply to both large and small banks. The public will have 60 days to comment on the proposal.

FDIC Vice Chairman Thomas Hoenig
“It falls well short of achieving the kind of simplification that would provide truly meaningful benefit to the industry, investors, and the public," FDIC Vice Chairman Thomas Hoenig said of the capital proposal. Bloomberg News

But some questioned whether the proposal — written by the Federal Deposit Insurance Corp., Federal Reserve Board and Office of the Comptroller of the Currency — would actually make the process simpler.

“It is neither simpler nor less burdensome than the current rule. It is just different,” Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig said in prepared remarks. Hoenig said he supported the proposal being issued for comment because it included a question for the public regarding an alternative proposal to further simplify the process. But the current plan "falls well short of achieving the kind of simplification that would provide truly meaningful benefit to the industry, investors, and the public.”

The proposal would replace a current definition of "high volatility commercial real estate exposures" used in the standardized approach with a definition meant to be simpler, for "high volatility acquisition, development, or construction." It would also seek to simplify how banks deduct mortgage servicing assets and certain deferred tax assets from regulatory capital, as well as simplify the calculation of "minority interest" in regulatory capital.

The changes are “intended to simplify and clarify a number of the more complex aspects of the agencies’ capital rules,” said FDIC Chairman Martin Gruenberg in prepared remarks for the agency's board meeting. They are part of an effort to “reduc[e] regulatory burden on community banks,” he added.

However, it is unclear whether the highly technical modifications will result in a simpler capital requirement scheme, industry representatives said.

"This just doesn't really simplify things too much," said Chris Cole, executive vice president and senior regulatory counsel for the Independent Community Bankers of America. “Overall, we think the proposal has some good parts and some other parts that we have concerns about."

A helpful change for community banks, Cole said, would be a measure to raise the threshold at which mortgage servicing assets and "temporary difference deferred tax assets" are deducted from regulatory capital.

But the new definition for higher risk construction loans could be trickier for some banks, he added. For example, the expanded HVADC category would include a broader range of assets, including credit facilities that primarily finance or refinance acquisition, development or construction activities. That could affect banks' actual capital requirements, but regulatory staff said any changes would be modest.

"They're seeing this basically as being capital neutral,” Cole said. “I think there will be some capital impact. But it depends on the bank.”

The American Bankers Association echoed a similar concern. In a statement, ABA President and CEO Rob Nichols said the proposal was "a step in the right direction," but he added that "the proposed provisions affecting commercial real estate will require careful evaluation to ensure they achieve the goal of encouraging business lending — especially to small businesses."

Regulators who signed off on the proposal said they would be open to exploring further changes before the plan is finalized.

The proposal “is a positive step toward reducing regulatory burden, especially on community banking organizations, allowing certain banks to put more of their capital to work,” said acting Comptroller of the Currency Keith Noreika.

“I am open to exploring additional options to simplify the capital rule further and to tailor it to better match the size and complexity of institutions while maintaining sufficient quantity and quality of capital,” he added.

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Lalita Clozel

Lalita Clozel covers fintech regulation, anti-money-laundering, cybersecurity and the Federal Deposit Insurance Corp. in American Banker's Washington bureau.