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Basel III – The Impact on Your Bank

August 2012

Strictly Private and Confidential

several new concepts and adjustments will be introduced. and other assets Confidential – Not for Redistribution 2 . past due loans. Some of these include: Common Equity Tier 1 Capital Accumulated Other Comprehensive Income Trust Preferred Securities for Bank Holding Companies Unconsolidated investments in other financial institutions Deferred tax assets Risk weighting for 1-4 family loans Risk weighting for construction loans.Major Changes Resulting from Basel III Under the new Basel III rules.

other adjustments are new. and Cumulative Preferred are now only included in Tier 2 Capital since they do not meet the definition of equity under GAAP. CET1 includes common equity as defined under GAAP and does not include any other type of noncommon equity under GAAP.many of these are consistent with adjustments under the current rules. SBLF Preferred. Confidential – Not for Redistribution 3 . It also includes a number of adjustments . However. TRUPS. and TARP Preferred are included in Additional Tier 1 Capital. a new capital measure called "Common Equity Tier 1 Capital". or CET1. Sub Debt.Various Capital Measures Under the new Basel III rules. Non-Cumulative Perpetual Preferred Stock. has been created.

they will be limited in regards to dividends.00% Leverage ratio in order to be well-capitalized. firms are still required to maintain a 5. and significant discretionary bonuses. Confidential – Not for Redistribution 4 . While the Capital Conservation Buffer does not impact the Leverage ratio.50% If firms do not meet these minimum capital ratios. share repurchases.Capital Conservation Buffer Basel III also introduces the Capital Conservation Buffer ("CCB") that essentially requires banks to maintain a minimum: • • • Common Equity Tier 1 ratio of 7.50% Total Capital ratio of 10.00% Tier 1 capital ratio of 8.

Common Equity Tier 1 Capital and Additional Tier 1 Capital Confidential – Not for Redistribution 5 .

Tier 2 Capital Confidential – Not for Redistribution 6 .

Confidential – Not for Redistribution 7 . As a result of this. In other words. a net cash flow gain would be deducted from CET1 while a net cash flow loss would be added to CET1. AOCI is typically included in regulatory capital except for unrealized net gains and losses from cash flow hedges.AOCI Under Basel III. the cash flow hedge will be excluded from CET1 while the mark-to-market on the AFS investment will be included in CET1. This applies to all situations including those in which the hedge is used for an AFS investment.

(A struggling bank unable to generate income is unlikely to realize these benefits at the time that it most needs them in order to maintain adequate capital levels). However. banks are allowed to include temporary differences (up to a certain limit) that are unrelated to operating losses or tax credit carry forwards since these typically have value regardless of the profitability of a firm. These DTAs are subject to the individual and aggregate threshold limits. will be deducted from CET1 due to the uncertainty of a firm to be able to recognize the value. including those that were acquired via an acquisition.DTAs Under Basel III. Confidential – Not for Redistribution 8 . any DTAs related to Operating Losses and Tax Credit Carry forwards.

a bank is required to deduct from CET1 any individual amount that exceeds 10% of the bank's CET1 capital prior to the Individual or Aggregate Deduction Confidential – Not for Redistribution 9 .Individual Deduction The Basel III Individual Deduction applies to the following three balances: • • DTAs unrelated to operating losses or tax credit carry forwards Mortgage Servicing Assets (MSAs) • Common stock unconsolidated investments where the bank owns 10% or more of the common stock of the other firm. For each of these individual items.

the Individual Deductions related to MSAs and the Aggregate Deduction combined must be equal to or greater than 10% of the fair market value of the MSAs. In addition. Confidential – Not for Redistribution 10 .Aggregate Deduction The Basel III Aggregate Deduction is a deduction used to limit the aggregate amount of the three individual balances from the Individual Deduction that can count towards CET1 to 15% of the CET1 AFTER this adjustment is applied.

Risk Weighted Assets Confidential – Not for Redistribution 11 .

or HVCRE Past Due Loan Exposures Confidential – Not for Redistribution 12 . These adjustments include an increase in risk-weighted assets for the following: • • • 1-4 Family Loans based upon the LTV of the loans High Volatility Commercial Real Estate.Risk Weighted Assets Risk Weighted Assets are also adjusted under the new Basel III rules.

Lien and HE Loans typically have a risk weight of 100%. (Since a loan with a high LTV results in greater risk to the bank. 1-4 Family First Lien Loans typically have a risk weight of 50% while 1-4 Family Jr. the risk weight should be higher as well to represent the increased risk). Confidential – Not for Redistribution 13 .Risk Weighted Assets – 1-4 Family Loans Under current rules. or "LTV". Under Basel III. the loan-to-value. Lien and Home Equity Loans. Generally speaking. of these loans is used to determine the risk weight. Basel III requires 1-4 Family Loans to be separated into two categories before applying the risk weight. Category 1 loans are 1-4 Family First Lien loans that meet all of the following criteria: • • Fully amortizing with no balloon Have term less than or equal to 30 years • Have documented/verified borrower income Category 2 loans are 1-4 Family First Lien loans that do not meet the definition of Category 1 AND 1-4 Family Jr.

The "Value" in LTV is equal to the lesser of the A) actual acquisition cost of the property or B) the estimate of property's value at origination of loan or at time of restructuring or modification. The LTV for purposes of Basel III does not include or recognize Private Mortgage Insurance. the risk weight by LTV is as follows: • • • • <60% = 35% risk weight 60 to 80% = 50% 80 to 90% = 75% >90% = 100% For Category 2 loans under Basel III. the risk weight by LTV is as follows: • • • <80% = 100% risk weight 80 to 90% = 150% >90% = 200% The "Loan" amount in LTV is equal to the current unpaid principal balance. Confidential – Not for Redistribution 14 .Risk Weighted Assets – 1-4 Family Loans For Category 1 loans under Basel III.

development. Confidential – Not for Redistribution 15 . acquisition. Under Basel III. and construction loans ("ADC") or High Volatility Commercial Real Estate ("HVCRE") will receive a risk weight of 150% due to the increased risk of these loans.Risk Weighted Assets – High Volatility CRE Under current rules. C&D and commercial real estate loans typically have a risk weight of 100%.

This does not apply to 1-4 Family Loans. In order to better represent this risk. the risk weight of a loan does not typically change when a loan goes into nonaccrual status or is 90+ past due even though a nonaccrual loan or a 90+ PD loan has greater risk than a performing loan. Government Guaranteed Loans.Risk Weighted Assets – Past Due Loans Under current rules. Confidential – Not for Redistribution 16 . nonaccrual and 90+ PD loans will receive a risk weight of 150% under Basel III. or FDIC Guaranteed Loans.

com HD Jacobs Product Expert 434-951-7710 hjacobs@snl.Key Contacts John Montgomery Director of Financial Institutions 434-951-7669 Confidential – Not for Redistribution 17 .com Julie Jones Business Development Manager 434-951-4419 jjones@snl.