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TCH Opposes Basel III’s Removal of “AOCI” Filter from Regulatory Capital

The Clearing House Association submitted a letter to the Fed, FDIC and OCC regarding the removal of the existing filter of certain unrealized gains and losses on financial instruments (the “AOCI Filter”) from regulatory capital components. Elimination of the AOCI Filter would (i) force the recognition in capital ratios of unrealized gains and losses that result principally from movements in interest rates as opposed to changes in the relevant underlying credits, which are likely never to be realized and typically result in no adverse effect whatsoever on the banking organization, (ii) force banks to maintain ratios of both common equity Tier 1 (“CET1”) to risk-weighted assets and Tier 1 capital to risk-weighted assets substantially above the levels that would otherwise apply after buffers in order to avoid the sanctions applicable to banks that fall into the buffer range, (iii) introduce substantial volatility into CET1 and Tier 1 capital as measures of capital, and (iv) deprive banks of an important asset-liability management tool. The letter strongly urges the agencies to revisit the appropriateness of Basel III’s removal of the AOCI Filter as they proceed to propose their own guidelines and regulations implementing Basel III.