Federal financial institution regulators are asking the public to discuss whether the Basel II risk-based capital standards provide enough flexibility to address exposures at nonbank financial companies.

The Office of the Comptroller of the Currency, the Federal Reserve System and the Federal Deposit Insurance Corp. are preparing to publish a notice of proposed rulemaking in the Federal Register.

The financial institution regulators want to change the “advanced risk-based capital adequacy standards” to mesh better with the provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act, and they want to change the general risk-based capital rules to mesh with act rules concerning weighting of the riskiness of classes of assets generally not held by depository institutions.

The advanced RBC rules are based in part on the Basel II proposals that were developed by the Basel Committee on Banking Supervision.

There is supposed to be a 3-year transition.

“For what specific types of exposures do commenters believe this treatment is appropriate?” officials ask about the new approach to RBC standards. “Does the proposal provide sufficient flexibility to address the exposures of depository institution holding companies and nonbank financial companies supervised by the Federal Reserve? If not, how should the proposal be changed to recognize the considerations outlined in this section?”

Officials note that the Dodd-Frank may bring some financial institutions that were not previously subject to consolidated RBC requirements under the supervision of the Federal Reserve System.

“Some of these companies are likely to be similar in nature to most depository institutions and bank holding companies subject to the general risk-based capital rules,” officials say. “Others, may be different, with exposure types and risks that were not contemplated when the general risk-based capital rules were developed.”

Under the current rules, some insurance companies could have to put risks in the 100% risk weight category simply because those risks are not assigned to a lower-risk category, officials say.

“An automatic assignment to the 100% risk weight category without consideration of an exposure’s economic substance could overstate the risk of the exposure and

produce uneconomic capital requirements for a covered institution,” officials say.

The financial institution regulators want to change their advanced RBC rules by replacing the transitional provisions with a permanent provision that will involve institutions calculating minimum RBC requirements under both the general RBC rules and the advanced RBC rules.

“Each quarter, each banking organization subject to the advanced approaches rules must calculate and compare its minimum tier 1 and total risk-based capital ratios as calculated under the general risk-based capital rules and the advanced approaches risk-based capital rules,” officials say. “The banking organization would then compare the lower of the two tier 1 risk-based capital ratios and the lower of the two total risk-based capital ratios to the minimum tier 1 ratio requirement of 4% and total risk-based capital ratio requirement of 8%…”

- Allison Bell