NY Regulator Urges Small Bank Exemption from Basel III Ru

Benjamin Lawsky, the New York banking superintendent, said capital ratio requirements being considered by federal regulators should be eased for community banks with less than $10 billion in assets.

Lawsky wrote today to U.S. bank regulators in Washington, who are incorporating so-called Basel III capital rules into regulations under the Dodd-Frank law on banking, Wall Street and consumer protection. Proposed regulations on risk-weighted assets would place an undue burden on community banks, he said.

“Implementing the proposals as they stand now would place regional and community banks at a further competitive disadvantage, with potential ripple effects on the local markets, small businesses and consumers,” wrote Lawsky, who heads the state Department of Financial Services.

The Basel rules require banks to assess the risk of losses on their assets and raise sufficient capital to hold against those potential losses.

In an 11-page letter to officials of the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve, Lawsky expressed support for the overall goal set forth in Basel III of forcing banks to increase their capital ratios.

Smaller banks should be allowed to keep the risk-weighting calculations allowed by Basel I instead of adopting the more stringent calculations of Basel III, he argued. All but six of the banks he supervises would be covered by his proposal, Lawsky said in the letter.

Adopting his suggestion “may help allay community banks’ concerns that the additional costs to comply with Basel III will be another factor pushing them to consolidate with larger banks,” Lawsky wrote.

‘Essential’ Banks

“We believe that vibrant community banks are essential to small business development and the health of the U.S. economy,” he wrote.

Basel I, the first round of international rules, set out fixed so-called risk-weightings for different kinds of assets. Subsequent updates of the rulebook rely on assessments made by credit-ratings companies and banks’ internal models.

The letter isn’t Lawsky’s first attempt to use his position to effect change on a national level. In August, he threatened to pull Standard Chartered Plc’s license to operate in New York after learning that the U.K. bank had conducted $250 billion worth of “round-trip” clearing transactions in the past decade without disclosing the names of the Iranian clients behind those trades.

The action rankled federal regulators who were already reviewing Standard Chartered’s conduct. The bank agreed to settle with Lawsky by paying a $340 million fine. Federal regulators haven’t reached a settlement with the bank.

To contact the reporters on this story: Greg Farrell in New York at gregfarrell@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.