Simplified Capital Rules for Small Banks Proposed by Regulators

By Jeff Bater

Capital rules for community and mid-sized banks would be simplified under a proposal issued Sept. 27 by federal banking agencies.

The proposed rule would simplify the capital treatment for certain acquisition, development, and construction (ADC) loans and for mortgage servicing assets, aside from offering other relief.

The rule from the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Federal Reserve stems from a review the regulators began in 2014 under the Economic Growth and Regulatory Paperwork Reduction Act.

The proposal addresses what regulators called “the complex definition” of high volatility commercial real estate (HVCRE) exposures in the agencies’ standardized approach capital framework. The rule replaces it with a more straightforward definition for higher-risk ADC loans called high volatility acquisition, development, or construction (HVADC).

Acting Comptroller of the Currency Keith Noreika said in a statement that the proposed capital rule strikes “an appropriate balance between simplicity and risk-sensitivity for small and medium-sized institutions.”

Thomas Hoenig, vice chairman of the FDIC, criticized the proposal, saying it is “neither simpler nor less burdensome than the current rule.”

“It is just different,” he said in a statement. “It falls well short of achieving the kind of simplification that would provide truly meaningful benefit to the industry, investors, and the public. Unfortunately, the proposed changes will only perpetuate the disparate capital benefits across banks of different sizes and provide only minimal regulatory reporting relief.”

Banks Press for More

Most of the changes proposed Sept. 27 would apply to banks with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure.

A bank industry group said the proposal is “a step in the right direction,” but said it should apply to the largest U.S. banks as well. “We urge regulators to undertake similar commonsense efforts to refine capital rules for all banks,” Rob Nichols, president of the American Bankers Association, said in a statement.

Going forward, it is appropriate for the banking agencies to additional measures “to simplify the existing regulatory capital rules for community banks,” FDIC Chairman Martin Gruenberg said in a statement. He encouraged those commenting on the rule proposed Sept. 27 to focus on such approaches.

In June, Treasury Secretary Steven Mnuchin recommended the regulators simplify the overall capital regime for community banks. He also specifically suggested regulators move forward with efforts to simplify and clarify the definition of HVCRE loans “to avoid the application of higher risk-weights for loans where it would be unnecessary.”

To contact the reporter on this story: Jeff Bater in Washington at

To contact the editor responsible for this story: Michael Ferullo at

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