Coming out of the Great Recession, banks had a revised international framework for assessing bank capital and liquidity. The new framework introduced Common Equity Tier 1 (CET1) as a fourth capital ratio. By excluding goodwill and many intangible assets from its definition of capital, CET1 largely replaced tangible capital as a reference point for a number of parties. Additionally, the new framework allowed all but the largest institutions to make a one-time opt-out decision to exclude Accumulated Other Comprehensive Income (AOCI) from capital ratios.
The Federal Housing Finance Agency (FHFA), which is FHLBank Boston’s regulator, did not change its framework to align with these other industry changes, however. As a result, FHLBank Boston’s primary assessment of capital adequacy remains tangible equity-to-assets (tangible ratio), which is inclusive of AOCI. AOCI is itself predominantly a function of unrealized gains and losses on Available-for-Sale (AFS) investment securities.
Because of the rapid increase in interest rates this year, essentially all institutions with AFS securities have seen significant losses and, as a result, tangible ratios have declined. The larger the AFS portfolio and the longer the duration, the more significant the decline.