Independent Banker - November 2017 - 22

Grassroots
mortgage-servicing assets (MSAs),
certain deferred tax assets, investments
in the capital instruments of
unconsolidated financial institutions,
and minority interests. The proposal
would stop the implementation by
banks with less than $250 billion in
assets of the fully phased-in requirements
for these items, which is
scheduled for Jan. 1, 2018.
The agencies followed this proposed
pause with a proposal to eliminate
the individual 10 percent and aggregate
15 percent common equity tier 1
capital deduction threshold on these
assets. They would be replaced with
a new 25 percent deduction threshold
on the individual categories with
no aggregate threshold. The risk
weights for non-deducted amounts of
MSAs and deferred tax assets would
remain 250 percent.
While not a panacea, this is a welcome
move for community banks hit
hard by the punitive Basel III capital
treatment of high-quality community
bank assets, such as retained mortgage-servicing
rights. By severely
lowering the threshold deduction
and almost tripling the risk weight
assigned to MSAs when they are not
deducted, Basel III punishes community
banks that would like to service
mortgage loans.
These mortgage-servicing
provisions have instituted a counterintuitive
and counterproductive
disincentive for community banks
to service the loans they make. In
Unfortunately for the
industry, the regulators'
initial proposal is a
mixed bag with much
room for improvement.
many cases, community banks have
invested in these financial assets
for many years, and they have performed
well for the banks without
any problems. Restricting the ability
of community banks to hold MSAs
results in their being retained by
less-regulated entities that may not
provide the same level of local care
and diligence needed when maintaining
a relationship with a borrower or
other stakeholder. When loans are
serviced by locally based community
banks, consumers simply get better
service and have better outcomes if
a problem arises. Equally important,
mortgage-servicing rights retained
by community banks act as a natural
hedge against rising interest rates
and bring stability to earnings and
asset valuations when interest rates
rise rapidly. Unfortunately, many
community banks have stopped carrying
MSAs on their balance sheets
since the Basel rules took effect,
limiting the impact of the regulators'
recent revisions.
While the proposed treatment of
MSAs and other items is a welcome
change, new loan definitions could
have a negative capital impact
for many banks. The agencies are
proposing to prospectively replace
the high-volatility commercial
real estate (HVCRE) classification
with a new classification for highvolatility
acquisition, development,
and construction loans (HVADC).
This would carry a 130 percent risk
weight, down from 150 percent.
However, the new HVADC category
would include a much larger
category of loans. One-to-fourfamily
construction projects would
22 ICBA IndependentBanker November 2017
Independent Banker - November 2017

Table of Contents for the Digital Edition of Independent Banker - November 2017
