WASHINGTON — Bank regulators have agreed to indefinitely extend a deadline for all but the largest U.S. banks to comply with certain capital requirements, citing an expectation that the rules for those banks will soon be revisited.

In a joint release Tuesday afternoon, the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. said that the 2013 capital rules require banks to adopt a final set of capital deductions and risk weights by the beginning of 2018. But as part of last year’s Economic Growth and Regulatory Paperwork Reduction Act regulatory review process, the agencies had already determined that a simpler regulatory treatment of certain assets was warranted.

“Under the current capital rules, the transitional treatment for those items is scheduled to be replaced with a different treatment on January 1, 2018,” the notice said. “This proposal would prevent the implementation of the fully phased-in requirements for these items by banking organizations that are not subject to the advanced approaches capital rules prior to the agencies’ consideration of simplification to the capital rules.”

Federal Reserve building in Washington, D.C.
The Federal Reserve, along with the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp., issued a proposed rule to stave off a phase-in of certain capital requirements for all but the largest U.S. banks early next year. Bloomberg News

The proposal would not apply to banks with more than $250 billion in assets or more than $10 billion in overseas assets — so-called advanced approaches banks — and pertains to the capital treatments of certain assets: mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions and minority interests.

Under the existing capital rules, banks may deduct from their regulatory capital requirement 80% of the value of items that cannot be included in the standard regulatory capital framework. Banks also apply a 100% risk weight to MSAs, deferred tax assets and investments in capital in unconsolidated institutions that are not deducted from capital. That 80% deduction was set to expire on Dece. 31, and the 100% risk weight was supposed to increase to 250% beginning Jan. 1.

But the proposal would maintain the existing treatment for non-advanced approaches banks “while the simplifications [rule] is pending.” The agencies said they would “review the transition provisions again” as they move forward with a notice of proposed rulemaking that would encompass last year’s EGRPRA recommendations. The agencies are taking public comment for 30 days after publication in the Federal Register.

Ed Mills, a policy analyst FBR Capital Markets, said in a research note that the changes represented a win for mortgage banks and other small banks that were otherwise facing a steep boost in capital coverage. Banks that had already prepared for the phase-in could redeploy their capital elsewhere, he said.

"The proposal is likely to improve the profitability profile of smaller banks as smaller banks could be allowed to carry less capital," Mills said. "Accordingly, the proposal increases the likelihood of greater capital deployment via loan growth, dividends, buybacks, and whole bank M&A."

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