Basel III, US, and AOCI
An interesting aside of the US Basel III adoption is the relief of the inclusion of Accumulated Other Comprehensive Income (AOCI). Its inclusion in Common Equity Tier 1 regulatory capital (CET1) is only mandatory under the final rules for banks subject to the advanced approach, which is applicable to banks with total assets of $250 billion or if it is has total consolidated on-balance sheet foreign exposure of at least $10 billion (RTRS).
Watch that space, the battle on AOCI is not over. For example, look at the last line of footnote 10 of the Basel III rules, which says:
There is no adjustment applied to remove from Common Equity Tier 1 unrealised gains or losses recognised on the balance sheet. Unrealised losses are subject to the transitional arrangements set out in paragraph 94(c) and (d). The Committee will continue to review the appropriate treatment of unrealised gains, taking into account the evolution of the accounting framework.
Europe integrated this note in the new CRR IV regulation, see Article 80.4:
EBA shall provide technical advice to the Commission by 1 January 2014 on possible treatments of unrealised gains measured at fair value other than including them in Common Equity Tier 1 without adjustment. Such recommendations shall take into account relevant developments in international accounting standards and in international agreements on prudential standards for bank.
Current EU accounting rules apply IAS 39, which allows significant amounts of AOCI. If international accounting standards continue the accounting for AOCI in IAS 39 style, then the EC may decide to exclude gains from capital. It is then likely that the old CEBS prudential filters will make a come-back.