USA Law and Practice Contributed by: Edward P. O’Keefe, Neil T. Bloomfield, John A. Stoker and Kathryn (Kate) G. Wellman, Moore & Van Allen, PLLC
es to the capital rules, which are discussed in 11.1 Regulatory Developments . Regulatory Capital Minimums The US Basel III rules set out the elements of regulatory capital for banking organisations and methodologies for measuring the organisation’s risk-weighted assets (RWAs): a standardised approach using supervisory developed models, and an advanced approach for large, interna - tionally active organisations using its internal models. Capital ratios are calculated by divid - ing regulatory capital by RWAs. Minimum regu - latory capital ratios are required for Common Equity Tier 1 (CET1) Capital (4.5%), Tier 1 Capital (6%), and Total Capital (8%). Under US Basel III, institutions using the advanced approaches are required to calculate each ratio under both approaches and then use the more binding output. In addition, banking organisations are required to maintain a 4% minimum leverage ratio of Tier 1 Capital to average total assets. To avoid restrictions on capital distributions and certain bonus payments, organisations must also maintain an additional 2.5% CET1 capital conservation buffer on top of the minimum 4.5% CET1 requirement. Organisations with less than USD10 billion of total assets and that meet other qualifying con - ditions may elect to use a simplified method for calculating their regulatory capital ratio. These organisations are not required to calculate and report RWAs but instead must have a leverage ratio of more than 9% to be considered com - pliant with regulatory capital minimums and the capital conservation buffer. Additional Requirements for Large Banking Organisations The largest organisations are subject to addi - tional buffers, surcharges, and requirements.
Regulators currently scale application of these requirements by dividing these organisations into one of four categories: • Category I: BHCs that have been desig - nated as global systemically important banks (GSIBs); • Category II: organisations that are not US GSIBs but have either (i) USD700 billion or more of total assets, or (ii) USD100 billion or more of total assets and USD75 billion or more in cross-jurisdictional activity; • Category III: organisations that are not Cat - egory I or II having (i) USD250 billion or more of total assets, or (ii) USD100 billion or more of total assets and USD75 billion or more of certain risk indicators (short-term wholesale funding, non-bank assets, or off-balance sheet exposures); and • Category IV: organisations that are not Cat - egory I, II, or III and have USD100 billion or more of total assets. Current enhanced requirements for these institu - tions are set out below. Stress capital buffers (SCB) and countercyclical buffers The Federal Reserve Board annually assesses the effectiveness of the organisation’s capi - tal planning processes and the sufficiency of its regulatory capital to absorb losses during adverse economic conditions. The results of stress testing are incorporated into the regula - tory capital requirements by replacing the capital conservation buffer with the SCB. The size of each firm’s SCB is assessed annually based on the stress testing impact on CET1, with a floor for the buffer of at least 2.5%.
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