On September 27, 2017, the three federal banking agencies (the “Agencies”) released a Notice of Proposed Rulemaking (“NPR”), which proposes changes to certain aspects of the bank capital rules under the “standardized approach.” Of keen interest to many banks will be the proposal to modify the approach to the capital treatment of acquisition, development, and construction (“ADC”) loans characterized under the current capital rules as high volatility commercial real estate (“HVCRE”) exposures. Under current rules, banks are required to apply a 150% risk-weight to HVCRE exposures under the standardized approach. Since the introduction of the HVCRE definition under the standardized approach, banks have criticized the complexity of the HVCRE definition and its uncertain application. The proposed modifications are described as a simplification of the capital treatment of ADC loans. However, while attempting to simplify the capital treatment of ADC loans, the proposal generally broadens the ADC loans subject to a higher capital charge, while reducing the size of the capital charge for covered loans from 150% to 130%. Despite the lower capital charge, some banks may be required to carry more capital for ADC loans than under the current regime. Also, whether the new approach will be simpler remains to be seen.
The Agencies are soliciting comments on whether the new approach is workable and appropriate. The comment period will end 60 days after the NPR is published in the Federal Register.
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