The Federal Reserve has extended the comment period on its Basel III regulatory capital rulemaking from its original September 7 deadline until October 22, 2012. The rulemaking, which was the subject of a previous Ballard Spahr legal alert, actually comprises three separate rulemakings intended to implement many of the reforms suggested by the Basel Committee on Banking Supervision as well as certain U.S.-only requirements mandated by provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. 

The extension came in response to a number of requests. These include a letter dated August 2 from House Financial Services Committee Chair Spencer Bachus and a letter dated August 7 from 54 bankers’ associations. Both letters requested a 90-day extension in order to adequately deal with the complexities of the proposed rules. The Fed “split the baby” and granted a 45-day extension.  

An extension seems warranted, not only because of the complexities but also to identify and address any unintended consequences of the proposed rules. A July 30 article in American Banker discussed tests by four banks showing what their capital ratios would look like if the Basel III requirements were in effect now. The requirements will not be implemented for another five years.

Pursuant to the proposed rule, residential mortgages guaranteed by the government or its agencies would continue to enjoy a zero risk-weighting for those unconditionally guaranteed and a 20 percent risk-weighting for those conditionally guaranteed. All other mortgages, as well as home equity loans, would be subject to higher risk-weightings, depending on loan-to-value ratios, which could go as high as 200 percent. 

Banks with higher concentrations in mortgages without government guarantees, home equity loans, and elevated non-performing assets should face a greater risk of reduction in their capital ratios. The extent of the reduction could potentially be overly severe. The results of the type of experimental, internal testing that was reported by American Banker should arguably be carefully considered by regulators to ensure that the rules as currently proposed are not too stringent.