Of Capital Concern

By Kendrick, James | Independent Banker, December 2012 | Go to article overview

Of Capital Concern


Kendrick, James, Independent Banker


After expressing strong concerns for months, ICBA details its Basel III opposition in formal comments to regulators

Once thought to be beyond the scope of community banks, Basel III capital standards became a top priority for community banks when regulators virtually overnight proposed applying the onerous regulations to all banks, regardless of size. Originally designed to shore up the capital levels of the largest, internationally connected financial institutions that contributed to the recent financial crisis, the Basel III capital rules have been introduced in the United States to apply to even the smallest community banks of Main Street USA.

Since the Basel III capital framework and the standardized approach were proposed back in June of this year, ICBA has been the voice for community banks, saying they should be exempt from the stricter regulatory capital standards and the punitive risk weights on many bank assets, particularly residential loans like balloon mortgages. In its formal 19-page comment letter to the banking agencies submitted in October, the association explained the importance of exempting community banks from both the Basel III and standardized approach proposals. In the event that no such exemption is granted by banking regulators, the association provided recommendations on how regulators should more appropriately apply the proposals to community banks.

Exemption is essential

Foremost, ICBA called on federal banking regulators to fully exempt community banks from the Basel III and standardized approach proposals. The association wrote that the Basel III standards should not apply to U.S. financial institutions with consolidated assets of $50 billion or less that are not deemed systemically important financial institutions.

While ICBA supports strong minimum capital levels for all banks, many provisions in the proposed rules do not account for the unique community-based business model and activities of community banks. The proposed capital conservation buffer, new definitions for common equity Tier 1 regulatory capital, new risk weights for assets such as residential mortgages and the tight implementation timeline would present many expensive and unnecessary regulatory burdens for community banks. Further, these new mandates would do little or nothing to improve the safety and soundness of community banks.

ICBA wrote that applying Basel III proposals to community banks would represent a very large shiftin the definition of regulatory capital, minimum capital requirements and risk sensitivities of these institutions, which would inflict irreversible damage. The proposals would significantly erode community bank profitability and credit availability and would drive community banks out of business, furthering industry consolidation.

Next best thing

Absent a total exemption from the proposed rules, ICBA advocated for several modifications to Basel III and the standardized approach to simplify the rules. If regulators do not exempt community banks from the rules, ICBA called on them to:

» fully exempt banks under $50 billion in assets from the standardized approach for risk-weighted assets;

» reduce the proposed higher risk weights for balloon mortgages and second mortgages to their current Basel I levels;

» exclude changes in unrealized gains and losses in investment portfolios (accumulated other comprehensive income, or AOCI) from the calculation of regulatory capital for banks under $50 billion in assets to avoid harmful and unnecessary volatility in capital adequacy;

» exempt changes in the fair value of all obligations of the U.S. government, mortgage-backed securities issued by Fannie Mae and Freddie Mac and municipal securities if AOCI is not fully excluded;

» continue the current Tier 1 regula tory capital treatment of trustpreferred securities issued by bank holding companies with consolidated assets between $500 million and $15 billion to reflect congressional intent;

» exempt all thriftholding companies with assets of $500 million or less from Basel III and the standardized approach (just as bank holding companies are) or provide a policy rationale for why they are not exempt;

» include allowance for loan and lease losses (ALLL) in the definition of Tier 1 capital up to 1. …

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