Pub. 6 2011-2012 Issue 3

www.nebankers.org 16 Extraordinary Service for Extraordinary Members. A BIG REASON FOR THIS IS THE sheer scale of the law—more than 2,300 pages, requiring more than 250 new regula- tions and the creation of many new agencies. We are only at the beginning of a multi-year regulatory implementation process, with the vast majority of regu- latory standards yet to be implemented. For many banks, the persistent lack of certainty around potentially major regulatory requirements presents an independent challenge. Neverthe- less, most banks would rather see implementation of Dodd-Frank take as long as necessary to avoid the risk of potentially serious unintended conse- quences. During any lull, banks should be actively planning their business and compliance strategies using their best judgments about future implementa- tion of Dodd-Frank. Although the expectations for total capital standards remain uncertain as the agencies consider the level of ad- ditional capital that will be required in response to Dodd-Frank, one thing is certain: banks will be required to hold more capital. This article briefly examines recent key final rules, pro- posed rules, and proposed guidance on capital requirements in connection with (i) risk-based capital floors, (ii) risk retention, and (iii) stress testing. New Floors Under the Collins Amendment (Section 171) of Dodd-Frank, the mini- mum risk-based capital requirements applicable to all banks may not be less than those established for banks under the “prompt corrective action” regulations. In particular, under Sec- tion 171(b)(1) and (2) of Dodd-Frank, such risk-based capital requirements may not be “quantitatively lower” than the generally applicable risk-based capital requirements in effect on the date of enactment of Dodd-Frank, July 21, 2010. Subject to transition and phase-in periods, large internationally active The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) 1 is ambitious legislation designed to significantly transform the way the financial system operates. Yet in a year’s time, the rulemaking and regulatory process still has not delivered the kind of detail or clarity anyone expected. Dodd-Frank: Capital Confusion? Jeff Makovicka , Husch Blackwell LLP COUNSELOR’S CORNER banks that meet certain size or foreign exposure tests (generally $250 billion in consolidated assets or $10 billion in foreign exposure) 2 are required to calculate their risk-based capital requirements under the federal bank regulatory agencies’ internal ratings based and advanced measurement approach risk-based capital guidelines (the “advanced approach”). 3 Under the capital regulations prior to the Final Rule (see below), the minimum risk-based capital requirements ap- plicable to banks under the advanced approach could be lower, in certain circumstances, than those pursuant to the federal bank regulatory agencies’ general risk-based capital guidelines (the “general approach”). 4 Pursuant to the Collins Amend- ment, the federal banking agencies have adopted a final rule eliminating the dichotomy between the minimum risk-based capital requirements ap- plicable to banks operating under the general approach and those subject to the advanced approach (the “Final Rule”). Each quarter, the Final Rule requires banks subject to the advanced approach to calculate their minimum risk-based capital requirements under both approaches, compare the two results, and then use the lower of such ratios for purposes of determining compliance with their Tier 1 and total risk-based capital requirements. 5 The immediate ef- fect of the Final Rule is to potentially deny any positive effect of calculating a bank’s risk-based capital under the advanced approach compared to the general approach. Because of this, it is highly unlikely that any bank other than those required to do so (such as banks with $250 billion in consolidated assets) would elect to be subject to the advanced approach. Prior to the permanent floor im- plemented by the Final Rule, banks using the advanced approach could theoretically have operated with lower minimum capital requirements dur- ing a transitional floor period (and