Banks Say Regulators Should Rewrite Basel III Capital Rules

U.S. banks are protesting capital rules proposed by regulators to comply with international standards and have asked that rules for assessing risk in their assets be replaced with something easier to follow.

As written, the plans could “hinder credit availability, dampen economic growth and harm the competitiveness of the U.S. banking system,” according to a letter sent by financial industry groups to the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. -- the agencies that put out so-called Basel III proposals for a public-comment period ending yesterday.

The regulators proposed a tighter bank-capital regime in June to comply with an international agreement drawn up by the Basel Committee on Banking Supervision. The measures, adopted after the 2008 global financial crisis, are meant to make banks less vulnerable in future emergencies. They call for all U.S. banks to maintain “loss-absorbing capital” of at least 7 percent of risk-weighted assets.

“The proposals would have been more effective, with fewer negative consequences, if the agencies had first conducted an empirical study of the impact of the proposals on all segments of the U.S. banking sector,” according to the 181-page letter from the American Bankers Association, Financial Services Roundtable and the Securities Industry & Financial Markets Association. The groups also suggested the proposal for risk-weighting assets “should be simplified and easier to follow and implement” and that banks need at least a year to implement final rules.

No ‘Justification’

Goldman Sachs Group Inc. said in a letter dated yesterday that banks “should not be penalized by a five-fold increase in required capital” because they have financial relationships with brokers, as the proposals call for. There is no “discernible reasonable justification” for subjecting broker-dealers to a much higher risk weighting than exposure to U.S. banking units, the letter said.

Several of the top 20 U.S. banks by assets, including Capital One Financial Corp., SunTrust Banks Inc. and Regions Financial Corp., filed a joint letter that also asked for an impact study and that banks be given at least six months to meet the capital rules, as well as another two years after that to implement the standardized approach to risk-weighted assets.

“It is difficult to actually create or adopt any systems until the final rule is published because making changes to such technology after-the-fact is materially more expensive than waiting to have all the details,” the banks said in the letter, dated yesterday.

Levels ‘Too Low’

Marcus Stanley, policy director at Americans for Financial Reform, said that the proposals’ capital levels are “significantly too low” and banks “can play games” because of the complexity of measuring risk-adjusted capital in the proposals. Stanley, whose Washington-based group advocates for more aggressive financial regulations, said the proposed rules maintain the risk that banks will overextend themselves as they did before the crisis.

The June proposals pushed the stronger capital rules down to even the smallest banks. The Independent Community Bankers of America argued in its own letter yesterday that the Basel standards were “never intended to apply to a domestic community bank.”

Republicans on the House Financial Services Committee, including Chairman Spencer Bachus of Alabama and Jeb Hensarling of Texas, urged regulators to avoid a “one size fits all” approach on Basel and to instead tailor the requirements for community and regional banks.

‘Serious Concerns’

“While the higher capital requirements contained in Basel III are entirely appropriate for large, internationally active financial institutions that may pose a systemic risk to our economy, the application of these requirements to community and regional banks raises serious concerns,” the Republican lawmakers wrote regulators in an Oct. 18 letter.

Comptroller of the Currency Thomas Curry said in a speech today that community banks were included in the rules because they are not immune to failure.

“We need to keep in mind that over 400 community banks and thrifts have failed since 2008, and ultimately, they failed because they didn’t have enough capital for the risks they took,” he said at a banker event in Miami. Curry said last week that smaller U.S. banks may get longer transition periods and so-called grandfather clauses to help ease them into compliance and that regulators would be “thinking broadly about ways to reduce regulatory burden.”

Cost-Benefit Analysis

Senate Banking Committee ranking member Richard Shelby, a Republican from Alabama, said in a letter last week it’s “imperative” that regulators provide Congress and the public with a cost-benefit analysis.

The ABA and other groups said the U.S. banking sector already upped its Tier 1 capital measure from a pre-crisis 7.5 percent in 2007 to 12.7 percent last year.

“Rather than being a buffer to economic turbulence, this plan would cause capital to amplify economic volatility, making it more difficult for banks to serve customers in hard times and more expensive in even the best economic conditions,” said Frank Keating, president and chief executive officer of the Washington-based ABA, in a statement. “Basel III would punish institutions that make mortgage and small business lending a significant part of their operations.”

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