ABA Banking Journal - October 2008 - (Page 52)
BASEL II IMPACT Standardized approach; the total potential capital savings for this group is $31 billion. Median capital savings vary somewhat by region, charter type, and bank size. Table Four shows the median capital savings for institutions in each of the six FDIC regions. The median savings of 7.9% for the 954 banks in the New York region greatly exceeds the 1.8% savings enjoyed by banks in the Kansas City region. Table Five shows that thrifts receive greater capital relief than banks. Table Six shows that the benefits of Standardized compliance fall somewhat unevenly across the size spectrum, with the smaller institutions enjoying less capital relief than institutions with assets in excess of $100 million. Figure 1 Standardized compliance generates $6.2M in capital savings for Mercantile Bank of Quincy, IL Capital savings estimate* $105,000 Starting 1st Lien Jr. Lien FHA/Va/ SBA Retail CRE<$1M C&I<$1M Delinq. Unused<1yr Other Ops Risk New Regulatory capital requirement $100,000 ($3,946) $($258) $9,811 } $6.2 $95,000 ($3,335) $90,000 ($5,116) $2,046 $1,186 ($1,129) $85,000 ($5,426) $80,000 Note: *2008Q1 call report; SPC estimates Source: Second Pillar Consulting Capital differences explained The Standardized rule makes no distinction by geography, charter type, or asset size, so what can account for the differences in capital benefits shown in tables four through six? Differences in asset composition and profitability separate capital winners and losers under Standardized Basel II. Table Seven, for example, breaks banks into quartiles by the proportion of their loans that are first- lien mortgage exposures. The lowest quartile of banks, those with less than 6.4% first-lien mortgages, enjoy only 2.7% median capital savings, while those in the highest quartile, with portfolios comprised of more than 22.1% first-lien mortgages, have median capital savings of 6.5%. Similar analysis shows that the portfolio concentration of small-ticket C&I and CRE also drives capital savings. Profitability is the other key determinant of Standardized capital savings. Table Eight shows the impact of gross income margin on capital quality. Top quartile banks, or those with gross income margin of more than 4.5%, receive a median benefit of just over one percent, while the least profitable quartile, Table Nine Pillar three Disclosure Requirements Disclosure Examples Item Qualitative Quantitative Scope of Application Capital Structure Capital Adequacy Credit Risk Counterparty Risk Credit Risk Mitigation Securitization Operational Risk Equities List of any restrictions on transfer of funds and capital among entities Terms and conditions of hybrids and sub-debt that qualify for capital treatment Any aggregate regulatory capital shortfall across all legal entities Detailed reports of tier 1 and tier 2 capital composition Discussion of the bank’s approach to ensuring that its capital is Detailed risk-weighted asset requirements for various asset sufficient to support current and future activities classes, operational risk, and market risk (as needed) Definition of loan impairment; description of ALLL and credit risk management policy Discussion of policies for securing collateral and assigning credit limits and economic capital against exposures Description of policies for managing collateral, netting, and concentrations Description of program objectives and accounting practices for all securitization activities Description of operational risk policies and procedures Breakdown of portfolio delinquency and impairment by geography, industry type, remaining maturity Detailed accounting of credit derivatives margin loans, repo-style exposures, and netting agreements Amount of exposure covered by guarantees or credit derivatives Total outstanding securitized exposures, broken down by exposure type; summary of current year’s securitization activity None Discussion of policies covering the valuation and accounting for Fair values of both publicly and non-publicly traded securities; equity holdings in the banking book realized gains and losses from dispositions in the reporting period; capital requirements against equity positions General modeling philosophy for behavior of non-maturity deposits and loan repayment Change in economic value of equity or net interest income for changes in interest rates Interest Rate Risk in the Banking Book Source: Risk-Based Capital Guidelines, Standardized Framework, NPR 52 OCTOBER 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com
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