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Regulators Grilled Over Community Banks’ Basel Burden

“As we work toward finalizing the rule, we will seek to further tailor the requirements as appropriate for community banks,” said Michael S. Gibson, director of the Division of Banking Supervision and Regulation at the Fed. Photo: Chip Somodevilla/Getty Images
“As we work toward finalizing the rule, we will seek to further tailor the requirements as appropriate for community banks,” said Michael S. Gibson, director of the Division of Banking Supervision and Regulation at the Fed. Photo: Chip Somodevilla/Getty Images

U.S. banking regulators will write capital rules shaped by community-banker concerns that the proposals are too harsh, agency officials told critical lawmakers at a hearing today.

The Senate Banking Committee questioned officials from agencies seeking to adopt tighter international capital rules adopted by the Basel Committee on Banking Supervision. The regulators want to make the transition as easy as possible for community banks, according to the Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp.

“As we work toward finalizing the rule, we will seek to further tailor the requirements as appropriate for community banks,” said Michael S. Gibson, director of the Division of Banking Supervision and Regulation at the Fed.

Regulators received more than 1,500 comment letters including from community banks that said they shouldn’t be subject to the same capital requirements as larger banks under the Basel III rules. Regulators and lawmakers at the hearing said they understand the community bankers’ point of view.

“I am concerned that the proposed risk weights could have an adverse impact on small banks’ ability and willingness to offer mortgages, especially in rural areas,” Senate Banking Committee Chairman Tim Johnson said at the hearing.

Deadline Delayed

The regulators announced last week that they won’t hold banks to a Jan. 1 deadline in the proposals for boosting reserves against potential losses. The agencies are working “as expeditiously as possible” on rules proposed in June, meant to boost capital requirements to guard against a repeat of the 2008 credit crisis.

At the hearing, regulators refused to give a new timeline on the rule and instead said they need to spend the time to study the comment letters.

The Financial Stability Board said on Oct. 31 that only eight of the 27 countries that drafted the Basel III requirements were ready for the 2013 start date. The measures are scheduled to phase in and would fully apply from 2019.

The U.S. proposals call for all banks to maintain “loss-absorbing capital” of at least 7 percent of risk-weighted assets. They also establish new risk weightings for residential mortgages, commercial real estate, sovereign debt and securitizations that require more capital for riskier assets.

Gibson said the regulators are considering changes to the treatment of available-for-sale securities that critics have said would increase capital volatility if they are forced to keep track of unrealized gains and losses.

‘A Mess’

Before the hearing, Senator David Vitter, a Republican from Louisiana, said the proposal should be thrown out and questioned the witness selection.

“Basel III is a mess, and if the regulatory agencies were serious about fixing capital requirements, the heads of the agencies would be testifying,” Vitter said in a statement released yesterday. “Instead it appears they’re running from it.”

Vitter and Senator Sherrod Brown, a Democrat from Ohio, sent regulators a letter in August saying the Basel III rules are complex and may not be sufficient to prevent another financial crisis. They urged regulators to simplify the rules and focus on loss-absorbing capital buffers.

The smallest banks raised “the most fundamental issues” in their comments, said John Lyons, the OCC’s senior deputy comptroller for bank supervision policy. He said the agency will “carefully consider” assertions that community banks didn’t cause the crisis and should be exempt from the rules. The proposals already include “lengthy transition provisions and delayed effective dates” to help the banks, he said.

‘Lengthy’ Rules

“The future safety and soundness of community banks will depend on their having sufficient capital going forward,” Lyons said. “We recognize that understanding and complying with the proposed rules could still be difficult for community banks. However, it is also important to recognize that the proposed rules are lengthy, in part, because they address banks of all shapes and sizes.”

Senator Michael Bennet, a Democrat from Colorado, said community banks already have high capital and questioned what problem the rule was trying to solve.

“My worry from talking to folks in Colorado is they really worry that they will be driven out of business and this is going to lead to consolidation,” Bennet said of community banks. An FDIC official responded that regulators take the concerns of community banks very seriously.

Considering Costs

“We do not want to create a situation where the compliance costs make them uncompetitive or unable to serve their important roles in the local communities,” said George French, deputy director for policy in the FDIC’s risk-management arm.

Camden Fine, president and chief executive officer of the Independent Community Bankers of America, requested an exemption for community banks from the Basel rule.

“ICBA seeks a full exemption for all banks with less than $50 billion in assets from all new capital rules under Basel III in order to avoid large-scale industry concentration that would curtail credit for consumers and business borrowers, especially in small communities,” Fine wrote to the committee in a letter dated yesterday.

Targeted Delay

Any delay in the Basel rules for community banks should be for those institutions and those alone, Dennis Kelleher, president and CEO of Better Markets, an organization advocating stricter financial regulation, said in a letter to the committee yesterday.

Comptroller of the Currency Thomas Curry said last month that the regulators are “thinking broadly about ways to reduce regulatory burden,” and he said smaller U.S. banks may get longer transition periods and grandfather clauses to help ease them into compliance.

“These are proposed rules and we expect to make changes based on the comments,” French said. He said community banks contend “proposed risk-weightings for residential mortgages will force them to curtail or exit residential mortgage lending because of what they view as the excessively high level of some of these risk weights.”

Impact Analysis

The regulators’ testimony included analysis of the Basel rules’ impact on institutions of varying sizes.

“These estimates suggest that for most insured banks, the proposals would not result in a need to raise new capital,” French said.

Gibson also said the Basel Committee’s cost-benefit analysis found that Basel III would “significantly lower” the probability of a banking crisis for internationally active banks and have “only a modest negative effect” on gross domestic product and loss of credit.

In an Oct. 1 letter, Senate Banking Committee ranking member Richard Shelby, an Alabama Republican, said it is “imperative” that U.S. regulators provide Congress and the public with a cost-benefit analysis of the capital levels. At the hearing, Shelby said the regulators’ response shows they are “outsourcing their economic analysis to the Basel Committee and should start doing their own work.”

Regulators Doubted

“Given the failure of bank regulators to set appropriate capital levels before the crisis, I cannot help but doubt the regulators’ ability to set them correctly after the crisis,” Shelby said at the hearing.

Brown said the rules are so complex they favor the largest banks, leaving community banks and regulators at a disadvantage.

“It’s a relatively small number of regulators going up against some really smart well paid people working for these six mega banks, six huge banks and we need to work to figure out to make it more simple, to level the playing field and it’s not now,” Brown said.

Lloyd C. Blankfein, 58, chairman and CEO of Goldman Sachs Group Inc., said at a conference in New York yesterday that the proposed rules would also penalize larger, more complex banks.

Goldman Sachs, the fifth-biggest U.S. bank by assets, would have $728 billion in risk-weighted assets under the proposed capital rules, a 67 percent jump from what it tallied under earlier regulations, said Blankfein, who said that now “size and complexity come with a higher cost.”

That increase for the investment bank is larger than at its competitors, with Citigroup Inc. up 27 percent and JPMorgan Chase & Co. up 28 percent.

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