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OCC Provides Stress Test Guidance for Community Banks
On October 18, the OCC issued Bulletin OCC 2012-33, which provides guidance to community banks with assets of $10 billion or less on how to implement stress testing to assess risk in their loan portfolios. Stress tests are exercises designed to gauge the potentially adverse impact that a hypothetical scenario might have on earnings, loan loss reserves, and capital levels. The OCC reiterated that stress testing procedures for smaller community banks do not need to be as sophisticated as those used by larger national banks, but noted that all banks are expected to assess their capital adequacy in relation to overall risks and to have a plan for maintaining appropriate capital levels. The bulletin also included explanations of specific types of stress testing, a sample method for performing stress tests on a basic portfolio, and a table of common real estate characteristics that should be considered when evaluating the impact of a stress event on specific property types. Additionally, the OCC announced the availability of a new tool for performing stress tests on income-producing commercial real estate loan portfolios. The OCC plans to host a teleconference for bankers on December 3, 2012 to discuss this new guidance.
Federal and State Policymakers Comment on Federal Proposed Basel Capital Requirements
Last week, federal and state policymakers sent letters to federal regulators urging a change in course with regard to proposed regulations to implement the Basel III capital accords. On October 17, U.S. Senators Sherrod Brown (D-OH) and David Vitter (R-LA) expressed concern that the proposed approach would not be sufficient to prevent another financial crisis and urged the federal prudential regulators to simplify and enhance capital rules that will apply to U.S. banks. Specifically, the Senators asserted that Basel III's continued focus on risk-based capital ratios is too complex and opaque; instead the proposal should focus on "pure, loss-absorbing capital." On the same day, the Conference of State Bank Supervisors (CSBS) encouraged the federal agencies to consider the impact of their proposal on the national and local economies. The CSBS argued that Basel III is intended only to apply to large, internationally active banks, and suggested that capital requirements for other U.S. banks should be set through a separate rulemaking. In a second letter, the CSBS commented on a related rulemaking regarding a standardized approach to risk-weighted assets. In that letter, the state supervisors expounded on their recent objection to the proposal as "reactionary" and "overly complex." Earlier in the week, on October 15, Senate Banking Committee Ranking Member Richard Shelby (R-AL) objected to the rulemaking process and challenged the regulators to better explain (i) why the Basel III standards are appropriate for U.S. banks and how the regulators came to their determinations, and (ii) the impact on the U.S. baking system and the economy, including a detailed cost-benefit analysis. Also this week, other federal lawmakers, including Republican members of the House Committee on Financial Services, and the congressional delegations from Arkansas, Colorado, and Mississippi, submitted letters commenting on the proposals.
State Regulators Oppose Basel III Capital Requirements
On October 3, the Conference of State Bank Supervisors (CSBS) announced its opposition to the “highly reactionary” approach federal regulators have proposed to implement the Basel III capital accord. Although they support higher levels and improved quality of capital, the state regulators argue that the transaction-level approach proposed by federal regulators is too complex and leaves the financial system susceptible to more volatility. Instead, the state regulators favor an approach based on risk management and the supervisory process. Further, the state regulators charge that the federal proposal, including the proposed specific risk-weighted asset requirements, lack empirical support. The CSBS argues that the proposed standardized risk-weighted assets present a specific challenge to mortgage lending, and in other areas would replace supervisory judgment and institution-specific analysis. The state regulators believe that implementing Basel III as currently proposed will only increase industry costs, limit credit availability, and force industry consolidation.