Legislation, Oversight, Regulation

Fed issues interim rules on Basel III overlap with capital plans, stress tests

126px-US-FederalReserveSystem-Seal.svgThe Federal Reserve issued two interim final rules on Tuesday that clarify how companies should integrate Basel III rules into capital and business projections for the next cycle of scheduled capital plan submissions and stress tests.

Basel III rules were finalized in July and will start to phase in beginning in 2014 or 2015, contingent upon the size of the banking organization. The next capital planning and stress testing cycle runs from Oct. 1 to the fourth quarter of 2015, meaning the cycle overlaps with Basel III rules.

The interim final rule issued earlier this week applies to bank holding firms with $50 billion or more in assets and clarifies that the companies must, within the next capital planning and stress test cycle, incorporate revised capital framework into planning projects and tests.

Additionally, for the upcoming cycle, capital adequacy at large banking groups will continue to be assessed against a minimum five percent tier 1 common ratio calculated in the same manner as in previous stress tests and plan submissions.

The second interim final rule allows for a one-year transition period for most companies with between $10 billion and $50 billion in assets — the companies will conduct their first company-supervised stress tests this fall.

Under the final rules, which are effective immediately, companies are not required to use Basel III advanced approaches to calculate projected risk-weighted assets in a given cycle, unless the companies have been notified by Sept. 30 of the year prior to the start of the cycle.

Comments on the interim rules will be due before Nov. 25, and the rules could be revised in response to public comment.

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