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Of Mutual Interest

Of Mutual Interest

A compilation of Mutual, Thrift and Federal Savings Association news

  Aug. 6, 2012

ICBA Meets with Fed Governor on Basel III

ICBA staff and community bankers recently met with Federal Reserve Governor Elizabeth Duke to discuss the impact of the proposed changes to the regulatory capital framework on community banks. The recently issued proposals by the Fed, FDIC and OCC, better known collectively as “Basel III,” would implement new minimum capital levels and increase risk weights for certain assets, particularly residential real estate loans, including interest-only loans, balloon loans and second liens. Under the proposal, higher minimum capital levels would be accompanied by capital conservation buffers, which would limit a bank’s ability to make certain payments, such as dividends and executive bonuses. Additionally, prompt corrective action requirements would be increased.

ICBA is very concerned about the impact of the Basel III proposal. Bankers expressed their concerns about the implementation of Basel III and its impact on mutual banks. Because mutuals can generally only build capital cushions through the accumulation of retained earnings, they will need many years to ensure that enough capital can be generated to meet the new minimum capital standards. Further concerns were voiced on the additional capital required for originating balloon mortgages. These particular loans help banks to mitigate interest rate risk exposure and prevent the need for the use of more complex instruments like interest rate derivatives.

For more information on Basel III, click here.

FDIC FI Letter on Investments in Corporate Debt Securities by Savings Associations

The FDIC has issued a final rule that would prohibit state and federal savings associations from acquiring or holding a corporate debt security when the security's issuer does not have an adequate capacity to meet all financial commitments under the security for the projected life of the security. Savings associations must be in compliance with this rule, which implements section 939(a) of the Dodd-Frank Act, by Jan. 1, 2013. The FDIC has issued final guidance to all savings associations acquiring or holding corporate debt securities that sets forth due diligence standards for determining the credit quality of a corporate debt security. The FDIC does not expect the final rule to change the scope of permissible corporate debt securities investments. That is, if a corporate bond was a permissible investment prior to this final rule (because it was rated in one of the four highest categories), a bond with similar default probabilities will be permissible under this rule.

The FDIC requires that a savings association must determine that an issuer has adequate capacity to meet all financial commitments under the security for the projected life of the security before (and periodically thereafter) acquiring a corporate debt security. The range and type of specific factors an institution should consider will vary depending on the particular type and nature of the security. A due diligence analysis may include consideration of internal analyses, third-party research and analytics including internal risk ratings, the default statistics of external credit rating agencies and other sources of information appropriate for the particular security.

FDIC standards of creditworthiness will be satisfied if an issuer presents a low risk of default and is likely to make full and timely repayment of principal and interest.

Complete Financial Institution Letter

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