Saturday, September 21, 2019

To opt-out or not to opt-out, that is the question – A reminder on March 31, 2015 Call Report, Schedule RC-R, item 3.a

Posted by OnCourse Staff April 10, 2015 5:41pm

Photo Credit: http://www.business2community.com

 By Chris Van Der Stad, Director of Credit Risk Management

Over the last year there has been much discussion regarding the changes in regulatory capital measurement and reporting rules for Community Banks. The implementation of the Basel III related changes will come for community banks with the March 31, 2015 Call Reports (and FR Y-9C for their related bank holding companies). These changes were already implemented for the large banks (i.e., “advanced approaches” institutions) a year ago in 2014.

The most important item in the March Call Report is probably the one time “opt out” item on Schedule RC-R, line 3.a. This is meant to be a “one-time” election, which means that once made, your bank must keep it forever. To opt out, you must enter “1” for item 3.a.   A “0” indicates that you don’t want to opt out. Taking the “opt out” election allows your bank to eliminate the impact of certain items on regulatory capital. These are detailed in lines 9.a through 9.e. The most important such adjustment for most community banks is on line 9.a, which is to eliminate the market value adjustment for AFS securities from the regulatory capital calculation. You should look at and consider the additional items detailed in 9.b through 9.e and how they might impact your institution. Most community banks, however, will probably not be impacted in a major way by these additional items, now or in the future.

Many, if not most, Community Banks will probably choose “1” and elect to “opt out”. Their main reason for this is simple: the “yes” or “1”  election to “opt out” on item 3.a will keep the current treatment of the market value adjustment for Available for Sale securities in the determination of your bank’s regulatory capital. That is, a bank’s level of regulatory capital will not be affected by the market value adjustment on your AFS securities portfolio. Such market value adjustments are often a reflection of interest rate changes, and many expect rates to become more volatile in the future than they have been recently.

If you do not opt out, the market value adjustment will become part of your regulatory capital, and volatility in market values will create volatility in your regulatory capital level, hence your capital ratios. This volatility, combined with the coming phase in of higher regulatory expectations for capital ratios, is generally thought to be a source of unnecessary risk.

On the other side, there may be some benefits for “opting in” (i.e., putting a “0” in item 3.a). This will depend on whether there are any items detailed on lines 9.a through 9.e you want to include in regulatory capital, and whether you have (or expect to have) a large AFS portfolio. This depends on your particular situation and expectations for the future. However, as noted above, the AFS portfolio is commonly the largest impact from the “opt out” decision.

We have seen articles in the business press which describe some banks’ decisions to actually re-classify AFS securities to HTM. Such reclassifications have generally been done only by large banks which do not have the choice to “opt out”.  Rather, the only choice for them is to reclassify from AFS to HTM and thereby lose flexibility in managing their portfolios, or to accept the higher regulatory capital volatility and risk.  Their acceptance of a loss of portfolio management flexibility demonstrates their perception of the additional risks to regulatory capital ratios inherent in including the AFS market value adjustment.

Fortunately, community banks do not have to sacrifice flexibility in investment portfolio management to avoid regulatory capital volatility. They can keep the flexibility and eliminate regulatory capital volatility of the AFS portfolio market values by answering “1” on Schedule RC-R, item 3.a, thereby “opting out”.

Given the importance of your Bank’s election, we recommend a careful analysis by your senior management, the ALCO and Board of Directors. Many banks are adopting Board resolutions to affirm their choice on this matter. There are model resolutions to be found on the internet. At a minimum, the decision regarding this election and the reasons should be formally documented by your Bank. This should be done soon, as you probably do not want to put it off until the last minute and risk a clerical mistake (which could become a permanent election). This item should also be checked and rechecked before you submit your March 31, 2015 Call Report at the end of April 2015.

Comments

Add a comment

  • Required fields are marked with *.

If you have trouble reading the code, click on the code itself to generate a new random code.



 Image

OnCourse Staff

The OnCourse writing staff work to keep you i



OnCourse Staff's Posts Subscribe to RSS Feed



Flood Coverage – Still a Hot Regulatory Issue
Interagency Statement on Sharing BSA Resources and Challenges
New Jersey's Corporate Business Tax Legislation: A Look at the Impact for Banks
Correspondent Banking: The Challenges of Data Transparency
Regulation E and Business Account Errors
Controls over Employee and Officer T&E Expenses
Is Regulation CC Put on the Back Burner?
Training – An Investment and Risk Management Tool
Are You Gambling with Your BSA Program?
The Case of Foreign Banks and Heightened Scrutiny
IRS and New Jersey Tax Audits of Banks
State Taxation of Financial Institutions in Today's Environment
Does your 401(k) Plan need an Audit?
De-Risking of Foreign Correspondent Banks
Same Day ACH Credits – Phase One
FinCEN Finalizes Ruling on Beneficial Ownership and Ongoing Customer Due Diligence
Keep an Eye On Your Chip!
Is the IRS Status of your Defined Benefit plan in Jeopardy?
The Dilemma of Banking Medical Marijuana Businesses and Other Indirect Risks
Is your Institution Monitoring Working Capital Lines of Credit?
Financial Reporting and Regulatory Update on the Horizon
BSA/AML Training: Is your program effective?
Planning in a Consolidating Banking Industry
To opt-out or not to opt-out, that is the question – A reminder on March 31, 2015 Call Report, Schedule RC-R, item 3.a
Anti-Money Laundering – The Age of Technology
Top Compliance Topics Discussed at the NJ Bankers Compliance University
Some tips and tricks for dealing with Regulatory Examinations
Updated Regulation E Booklet from the OCC!
Is Flood Disaster Still on the Heat Map?
Have You Implemented Your Plan yet?
FDIC Consumer Newsletter
More Flood Insurance Changes...
Same Sex Married Couples - Ensuring Equal Treatment – Announcement from Consumer Financial Protection Bureau
Truth in Lending (Regulation Z) Annual Threshold Adjustments (CARD ACT, HOEPA and ATR/QM)
FFIEC Releases Revised BSA/AML Examination Manual: So what’s new?
OFAC Consolidates Non-SDN Listings
Coping with HOPA
Coping with the CFPB’s Ability-to-Repay Rule
ABA Survey on Impact of Dodd Frank Compliance
ABA Mortgage Origination Deskbook
Who handles Your Dormant Accounts?
Appraisal Disclosure Rule
Cybercriminals Broaden their Attacks in Social Networks
The Importance of Segregating a Bank’s Credit Function from its Lending Function
Appraisal Management Companies in Regulatory Crosshairs
All About the Home Owners Protection Act
Requesting Current Financial Information
Countdown to Windows XP End of Life and Support: Are you still at Risk?
314(b) Distinct Advantages for Financial Institutions
Where is the Document?
Building a Better Hen House
Ready the Ramparts! : IT Security and the Modern Bank
The Credit -- Er, IT Crisis?
Keeping the Balance: IT Security and the Org Chart
IT Security: "IT's" About Process
Wag the Dog
Consumerization of Technology and its influence on Information Security
Detective, Reactive and Preventive: Evolving Your IT Security
Do You Know The Security Features of the New $100 Bill?
Segregation of Duties for Wire Transfer Processing
How do you charge Early Withdrawal Fees on Time Deposits?
Do you still offer NOW Accounts?
Policy Changes Required – Do you Wait until Annual Approval?
Summarizing ACAMS White Paper on EDD and AML Risk Assessments (Industry Survey)
ACAMS to provide Free Webinar
ACBB Changes its Name
Who Do You Give Cash to?
ABA Briefing to Help Banks Address Cyber-security Threats
The OCC Issues Booklet: “A Common Sense Approach to Community Banking”
Safe Deposit Box Contents are not insured – But They COULD Be!
Allowance for Loan Loss Tips and Tricks
FDIC Can Review New Products
Let’s Talk About Overdrafts!
Community Banks Slowly Warm Up to Private Student Loans
Has your Bank updated the Adverse Action Notice?
Regulation E and NACHA Rules: When you Want to Stop Payment on a Recurring Debit
CFPB Stands Up Against Poor Debt Collection Practices
Don’t Forget the Small Stuff
Double Endorsed Checks: What is the Risk?
Social Media – Will the Regulators Do Spot Checks?
How Does Your Bank Handle Customer Requested Maintenance Changes?
OCC Releases Booklet on "Common Sense" Community Banking
New SAR Filing Updates
Is your BSA/AML automated monitoring system up to par?
The Importance of BSA Training
Office of Foreign Assets Control (“OFAC”) introduces the OFAC SDN Fuzzy Logic Search Tool
Filing the New CTR Forms: What you need to Know
FFIEC Proposed Risk Management Guidance on Social Media: Beware and Prepare
Solutions to Reducing Dormant Accounts at Your Institution
Pandemic Preparedness: Are you testing your Pandemic Plan?
Regulation E Foreign Remittance Rules
FFIEC issues revised “Supervision of Technology Service Providers” booklet
Expiration of Unlimited Deposit Insurance for NIBTAs
Is Your Institution's Marketing UDAAP Compliant?
What is Enterprise Risk Management?
New OCC Guidance Released on Investor Owned Properties
Electronic Work Papers - Why P&G Made the Switch
OCC to Toughen Exams in Response to United States Senate Permanent Subcommittee On Investigations
Clarifying Regulatory Obligations Regarding Continuing Activity SAR Filings
Federal Regulatory Agencies Proposal New Rule
Risk management - Smaller institutions and the benefits of ERM
Strengthening Your Loan Maintenance Monitoring
New Lending Proposal from CFPB
FDIC Reaches Settlement on Overdraft Fees
FRB Guidance on Foreclosures
Loan Denials and Withdrawals – Tips to Sure Up your Process
Regulation O – 5 Easy ways to avoid violations
The Summer of CFPB Proposals
Community Lenders Seize Market Share From Big Banks by Using Advanced Online Lending Technology
Dodd-Frank Rule to Change Legal Lending Limit Monitoring Requirements
The ABCs of a TDR
Supreme Court ruling for the Freeman, et al. v. Quicken Loans, Inc case
New FinCEN Guidance for CTR Aggregation for Businesses with Common Ownership (FIN – 2012 –G001)
Senior member of House of Financial Services Committee Introduces Overdraft Protection Act
FinCEN is looking to streamline the financial institution reporting process by issuing mandatory E-filing reporting requirements.
Curry: Operational Risk Now OCC’s Top Concern
JOBS Act Client Alert - Rules 506 of Regulation D
New Rules Proposal for Servicers Coming from the CFPB
Wall Street Receives Volcker Rule Clarity
De-stressing with stress testing
Banks Participate in Information Sharing to Battle Online Theft
IT security: Is your program still effective?
Banking Solutions: ALLL and GAAP in Agreement
How are the most recent regulatory enforcement trends that banks are facing today affecting internal audit? Why?
What are the most recent regulatory enforcement trends that banks are facing today?
Mobile banking: How do we get there?
UBS further struggles with $2 Billion loss by Rogue Trader
Capital One Becomes Dodd-Frank Test as Nation’s Fifth Largest Bank
Community Banks to receive US Funding for Small Businesses
FDIC fields questions about overdraft guidance
Negligent Hiring – A mistake can cost more than just money!
Regulatory Burden – Managing the Pain
From Embezzlement to Imprisonment: Former Citigroup employee faces charges with $19.2 million in bank fraud
TDR or Not to TDR …Much Ado about Nothing?
Finding the Right Hire
Model behavior: Is your ALM model capturing your bank’s risks?
ALLL best practices: Pay attention to qualitative factors
Abandoned Property Law, and its new New York State of Mind
Consumerization of Technology and its influence on Information Security
FDIC releases Provisions on Dodd-Frank to help Community Banks
Social Media in the Employment Arena – It Gets Funky!
The Proof is in the Pudding: Affects of Dodd-Frank on Community Banks
Banks and Businesses get "swiped" over Fees
A little bit of this, and a little bit of that: Fed Unveils list of Banks Helped during Financial Crisis of 2008
IT Security: "IT's" About Process
To Test or Not to Test; That is the Question
2011 Failed Bank List Hits 25
Wag the Dog
Committee on Financial Services to Hold Hearing on the Effects of Dodd-Frank on Small Biz and Banks Today
2011 Failed Bank List up to 18
A Culture of Whatever: On the Path to Proper Governance
The Test Drive: Leasing or Buying a HR IT Platform
Detective, Reactive and Preventive: Evolving Your IT Security
Cracking the ALLL Code: How to Develop the Right FAS 114 Methodology
Double Digits: Bank Closings up to 11 in 2011
FCIC Releases Report on the Causes of the Financial Crisis
Part of the In Crowd: Thoughts on the Dodd-Frank Act
Another One Bites the Dust: Regulators Close 4 Banks
Keeping the Balance: IT Security and the Org Chart
On Notice: FDIC Issues Rule for Temp Unlimited Deposit Insurance
2011 Failed Bank List Up to 3
Welcome to OnCourse
Stick 'Em Up!
Time for a Tune-Up: The Necessity of a HR Audit
Visa Instituting Two-Tiered Debit Card Interchange Structure
The First Failed Banks of 2011
The Credit -- Er, IT Crisis?
Painting a Masterpiece: The Art of the ALLL Reserve
The Law on Your Side: Understanding HR Regulations in 2011
Building a Better Hen House
Ready the Ramparts! : IT Security and the Modern Bank
No Respite from RESPA