Capital Adequacy Under Basel III
In 2015, the new Basel III requirements became effective for all banks. Also in 2015, mid-sized banks, those $10-50 billion, were required to publicly disclose capital stress test results for the first time. Credit Unions larger than $10 billion were required to submit capital plans to their regulators for the first time in 2015. The largest financial institutions, those with $50 billion or more in assets, commonly referred to as “systemically important” or “too big to fail”, have been subject to much more comprehensive capital plan and stress testing requirements since 2011.
Here’s the good news, despite systemically higher required levels of capital under Basel III, continued margin pressures and signs of credit softening, banks of all sizes across the country are well-capitalized. For example, in the states where we office, Oklahoma and Arkansas, banks held an average 17% of capital to risk-weighted assets at December 31, 2015 – that’s more than double the regulatory well-capitalized level (see table). Banks required to run capital stress tests, those over $10 billion, reported capital levels exceeding regulatory minimums, even under hypothetical, severely adverse scenarios.
However, because of the complexity in the rules, there is diversity in how financial institutions are implementing them. Capital planning, liquidity contingency planning and interest rate risk management are areas where banks are spending significant time and money to meet regulatory expectations, but have yet to realize any noticeable benefit in their business. Banks getting assistance from vendors are expected to have sound vendor management practices. We have seen a significant amount of effort on the part of financial institutions, large and small, and believe there is some opportunity to realize benefits, or at least tackle these rules more efficiently.
Capital planning and stress tests for larger banks are required to be audited, and interest rate risk models for all banks are required to be validated. HoganTaylor has performed audits of capital plans and stress tests and can assist in making your programs more reliable or more efficient. Our approach is very practical and follows the same methodology as your regulator, focusing on the requirements of the rules and the relevant supervisory guidance. Our audits of financial institutions have also been designed to address what matters most, and are performed by dedicated professionals with significant training in our Financial Institutions practice.