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Home Basel III - US Federal Reserve Issues Interim Final Rules Clarifying How Banking Organizations Should Incorporate U.S. Basel III Standards Into Capital Plans and Dodd-Frank Stress Tests

Federal Reserve Issues Interim Final Rules Clarifying How Banking Organizations Should Incorporate U.S. Basel III Standards Into Capital Plans and Dodd-Frank Stress Tests

Today, the Federal Reserve Board issued two interim final rules that clarify how U.S. banking organizations should incorporate the recently-adopted Basel III capital standards into their capital projections during the next cycle of capital plan submissions and Dodd-Frank stress tests, which will begin in fall 2013.

Blacklines Showing Changes:  We have created blacklines showing changes made by the interim final rules to the Federal Reserve’s existing capital plan and Dodd-Frank stress test regulations.  Links to these blacklines are at the end of this blog post.

The U.S. Basel III final rule was issued in July 2013 will be phased-in beginning in 2014 for advanced approaches banking organizations and beginning in 2015 for all other banking organizations. The nine-quarter planning horizon for the next capital planning and stress testing cycle runs from the fourth quarter of 2013 through the fourth quarter of 2015. Thus, the next capital planning and stress testing cycle, which begins October 1, 2013, overlaps with the effective date of the U.S. Basel III final rule.

The Federal Reserve’s first interim final rule applies to bank holding companies with $50 billion or more in total consolidated assets. The rule clarifies that in the next capital planning and stress testing cycle, these companies must incorporate the new U.S. Basel III capital standards into their capital planning and Dodd-Frank stress test projections using the transition paths established in the U.S. Basel III final rule.  The first interim final rule also clarifies that for the upcoming cycle, capital adequacy at these large bank holding companies would continue to be assessed against a minimum 5 percent tier 1 common ratio calculated in the same manner as under previous stress tests and capital plan submissions, ensuring consistency with those previous exercises.

The Federal Reserve’s second interim final rule provides a one-year transition period for most banking organizations with between $10 billion and $50 billion in total consolidated assets (mid-sized firms). These mid-sized firms will be conducting their first company-run Dodd-Frank stress tests beginning in fall 2013.  They will be required to calculate their stress test projections using the existing Basel I-based capital rules during the upcoming stress testing cycle to allow time to adjust their internal systems to the new U.S. Basel III capital framework.

The interim final rules also clarify that an advanced approaches banking organization must be notified that it has completed its parallel run by September 30 of a given year in order to be required to project its capital ratios using the advanced approaches capital rules for the capital planning or stress testing cycle that begins on October 1 of that year.

The interim final rules are effective immediately. The Federal Reserve will accept comments on the interim final rules through November 25, 2013, and the rules could be revised later in response to comments.

View blackline of Fed Non-Covered Company DFAST Interim Final Rule vs Original Rule (PDF) 

View blackline of Fed Capital Plan Rule Interim Final Rule vs Original Rule (PDF)

View blackline of Fed Covered Company DFAST Interim Final Rule vs Original Rule (PDF)

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