Regulators approve slew of final reg relief bill rules

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WASHINGTON — Federal regulators have finalized a handful of rules mandated by last year's regulatory relief law.

The Federal Deposit Insurance Corp. voted to approve the regulations at a board meeting Tuesday, with the Federal Reserve expected to follow suit later in the day. The Office of the Comptroller of the Currency finalized its rules late Monday.

One exempts certain custody banks from including certain deposits in their calculation of the Supplemental Leverage Ratio.

Basel III requires large, internationally active banks to hold at least 3% capital based on a simple calculation of total assets to total liabilities without taking into account the relative riskiness of the bank’s underlying assets. Custody banks have long argued that the rule is too restrictive.

The rule, which was mandated by last year’s Economic Growth, Regulatory Relief, and Consumer Protection Act — also known as the Crapo bill, named for its lead author, Senate Banking Committee Chairman Mike Crapo, R-Idaho — exempts from the SLR deposits held at the central bank by certain custody banks and/or custody banking subsidiaries of bank holding companies.

A critical sticking point of the rule has been how the regulators would define a custody bank, which the Crapo bill defines as “any depository institution holding company predominantly engaged in custody, safekeeping, and asset servicing activities, including any insured depository institution subsidiary of such a holding company.” The agencies defined custody banks as those with a ratio of assets-under-custody to total assets of 30:1 — a definition that was unchanged from the agencies’ April 2019 proposal.

Only Bank of New York Mellon, State Street and Northern Trust would qualify for relief under the final rule. It take effect April 1, 2020.

Regulators issued a rule that raises the risk-based capital requirements for certain High-Volatility Commercial Real Estate exposures from 100% to 150%. The rule specifically applies to acquisition, development and construction loans that are primarily financed or refinanced by the institution and whose repayment is dependent on income or sale proceeds from said property. The rule makes exemptions, however, for one- to four-family housing developments, community development projects or agricultural development projects.

The agencies also unveiled a final Standardized Approach for Measuring Counterparty Credit Risk — known as the SA-CCR rule — that would revise the way the agencies require banks to hold capital against their derivative holdings. Regulators had used an approach known as the Current Exposure Methodology for decades, but the Crapo bill required regulators to apply a more risk-sensitive approach.

Under the rule finalized by the FDIC on Tuesday, banks designated as Category I and II under the Fed’s prudential standards framework would be subject to the SA-CCR, which would effectively allow banks to offset countervailing derivative exposures against one another — a process known as “netting.” Officials at the agencies said that they expect the rule to result in no overall change in capital levels in the banking system, though banks that currently hold larger margins against their derivative holdings would likely have to hold less capital and banks with less margin would be required to hold more.

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