regulatory expectations: capital … expectations: capital management basel iii, planning, &...
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REGULATORY EXPECTATIONS:
CAPITAL MANAGEMENT Basel III, Planning, & Policies
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REGULATORY EXPECTATIONS:
CAPITAL MANAGEMENT (Basel III, Planning, & Policies)
Dave WicklundDirector of Educational and Advisory Services
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Plansmith•BankersGPS
•Call Report Data•Updated Quarterly•Web-based System
•Financial Compass•Instrument-level Inputs•Monthly Updates•Client-hosted Software
•Budget Compass•Educational and Advisory Services
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Capital Management• Basel III
• Capital Planning
• Elements of a Capital Policy
• Capital Stress Testing
• Summary/Questions
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Basel III• Common Equity Tier 1 Capital (CET1) Ratio
• Revised Prompt Corrective Action Standards
• Capital Conservation Buffer
• Changes to Asset Risk Weighting
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Basel III-CET1 Risk Based Capital Ratio• Definition: Common Stock, Surplus, & RE
+/- Accum Other Comprehensive Inc.
- Goodwill, Intangibles(excluding MSAs),and DTA (from carryforwards)
+ Portion of DTA (from carryback) and MSAs; both subject to thresholds
• All as a percent of Risk Weighted Assets6
Basel III-Revised PCA Standards
**Applicable January 1, 2015**
ADEQUATELY CAPITALIZED WELL CAPITALIZED
Current 2015 Current 2015
Total RBC 8% 8% 10% 10%
Tier 1RBC 4% 6% 6% 8%
T1 Leverage 4% 4% 5% 5%
CET1 RBC NA 4.5% NA 6.5%
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Basel III-Capital Conservation Buffer• CET1 Equal to 2.50% of Risk Weighted Assets
• Phase-in Period (2016-2019)
• Regulatory Minimums (for PCA)
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Current New New + Buffer(full phase in)
Total RBC 8% 8% 10.5%
Tier 1 RBC 4% 6% 8.5%
CET1 RBC NA 4.5% 7%
2016 2017 2018 2019
0.625% 1.25% 1.875% 2.50%
Basel III-Capital Conservation Buffer• CET1 Equal to 2.5% of Risk Weighted Assets
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Basel III-Capital Conservation Buffer• Ramifications
Dividends
Payment of Discretionary Bonuses
Share Buybacks
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Basel III - Asset Risk Weighting• Changes
PD Loans – 150% (portion not guaranteed/secured)
High Volatility CRE – 150%
• No Change
1-4 Family Residential Mortgages
Other Loan Types (balloons, C&I, Consumer, some CRE)
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Basel III - Resources• Federal Reserve “New Capital Rule Community Bank
Guide” www.federalreserve.gov/bankinforeg/basel/files/
capital_rule_community_bank_guide_20130709.pdf
• FDIC “Expanded Community Bank Guide to the New Capital Rule for FDIC-Supervised Banks” www.ffiec.gov/regulations/capital/Community_Bank_Guide_Expanded.pdf
• Draft Call Report Guidance (RC-R) www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_FFIEC041_20130809_draft_f_i.pdf
• FDIC Capital Estimation Tool www.fdic.gov/regulations/capital/Bank_Estimation_Tool.xlsm
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Capital Planning
Regulatory Guidance• OCC-2012-16: Guidance for Evaluating Capital
Planning and Adequacy
• FRB Community Bank Connections: “Capital
Planning: Not Just for Troubled Times”
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Capital Planning• Consider short and long-term needs
• Tailored based on institution
Risk Profile Asset Quality
Growth Plans
Earnings
Complexity
Charter/Corp. Structure (Mutual, Holding Company, etc.)
Operating Activities (lending, “non traditional”) 14
Capital Planning• Identify and Evaluate Risks
• Set and Assess Capital Goals
• Maintain Strategy to Ensure Capital AdequacyDevelop/Document Capital Options
Project Future Levels and Stress Test
• Ensure Process IntegrityBoard Oversight
(Policy Approval, Level Monitoring, Stress Testing Review)
Documentation 15
Capital Policy• Institution Background
• Risk Profile
• Capital Requirements
• Capital Alternatives
• Dividends
• Reporting Requirements and Policy Exceptions
• Policy Review16
Capital Policy-Risk Profile• Credit Risk
• Operational Risk
• Interest Rate Risk
• Liquidity Risk
• Compliance Risk
• Reputational Risk
• Strategic Risk17
Capital Policy-Capital Requirements• Assumptions
Growth
Loan Levels
Liquidity
Borrowings
Profitability
Economic Conditions
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Capital Policy-Capital Requirements• Limits
Tier 1 Leverage
Tier 1 Risk Based Capital
Total Risk Based Capital
CET1
Matrix above is an example only, not intended to be standards for all financial institutions19
Total RBC Tier 1 RBC CET 1 RBC Tier 1 Levg.
Green Zone - No action required >12.5% >10% >9% >8%
Yellow Zone - Action plan required 10.5%-12.5% 8.5%-10% 7%-9% 5%-8%
Red Zone - Capital improvement action required <10.5% <8.5% <7% <5%
Capital Policy - Capital Alternatives• Increase Earnings
• Holding Company Injection
• Sell Stock (if no holding company)
• Trust Preferred Stock ???
• Subordinated Debt
• Asset Management20
Summary/Questions• Guidance - Limited formal guidance; OCC and
FRB Publications and Examination Manuals
• Basel III – CET1, increased PCA thresholds
• Capital Planning – Dynamic process includes monitoring, projections, and stress testing
• Capital Policy - Risk Profile, Assumptions, Limits, Alternatives, and Dividends
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Plansmith’s Educational & Advisory Services• Model Assumption Development/Documentation• ALM Policy & CFP Review/Development• ALCO Assistance/Participation• Sensitivity Testing• Backtesting• Independent Review• Board and/or Senior Management Training• Capital Planning and Stress Testing
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THANK YOU FOR ATTENDING
REGULATORY EXPECTATIONS:CAPITAL PLANNING
Dave WicklundDirector of Educational and Advisory Services
1.800.323.328123