The federal banking agencies have released a regulatory capital estimation tool to help community banks understand the potential effects of the recently approved regulatory capital framework on their regulatory capital ratios. The estimation tool announced on November 19 is available through the websites of the Federal Reserve, the FDIC and the OCC. The estimation tool is not part of the new framework and not a component of regulatory reporting. According to the agencies, results obtained by using the tool are simplified estimates that may not precisely reflect a bank’s actual capital ratios under the new framework. The agencies also cautioned banks that the estimation tool requires certain manual inputs that could have meaningful effects on results and recommended that banks refer to the specific requirements of the new regulatory capital framework when using the estimation tool. The new regulatory capital framework implements the Basel III capital reforms and certain changes required by the Dodd-Frank Act. The new framework was approved in July when the Federal Reserve and the OCC approved a joint final rule and the Federal Deposit Insurance Corporation approved an interim final rule. The joint final rule and the interim final rule are substantively identical. The new framework will begin phasing in on January 1, 2015 for most banking organizations, and the phase-in period for the largest institutions will begin in January 2014.

Nutter Notes: As the implementation dates for the new regulatory capital framework approach, banks that are in a holding company structure should consider revising their capital and dividend policies to account for the new minimum regulatory capital ratios and other capital requirements mandated under the new framework. For example, the new framework increases the minimum tier 1 capital ratio (the ratio of tier 1 capital to risk-weighted assets) from 4% to 6% and imposes a new common equity tier 1 capital ratio requirement, which requires that all banking organizations maintain a ratio of common equity tier 1 capital to risk-weighted assets of 4.5%. The new framework also establishes limits on a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements, known as the capital conservation buffer. If a capital ratio of a banking organization falls below the capital conservation buffer, the new regulatory capital framework imposes incremental limitations on capital distributions and discretionary bonus payments based on a maximum payout ratio.