Basel Burden on Small Banks Faces Scrutiny at House Hearing

Basel Burden on Small Banks Faces Scrutiny at House Hearing
Michael S. Gibson, left, director of the Division of Banking Supervision and Regulation with the Board of Governors of the Federal Reserve System, John Lyons, center, Chief National Bank Examiner at the Office of the Comptroller of the Currency and Greg Gonzales, Commissioner of the Tennessee Department of Financial Institutions appear before the House Committee on Financial Affairs. Photographer: Rich Clement/Bloomberg

U.S. community banks and insurers are pressing their case for separate treatment from the biggest financial firms as House lawmakers examine the impact of international capital rules at a Washington hearing.

Industry executives testified today along with regulators before two House Financial Services subcommittees after a Nov. 14 Senate hearing on efforts to implement standards adopted by the Basel Committee on Banking Supervision.

Community bankers have opposed a proposal by the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. that would require all U.S. banks to maintain “loss-absorbing capital” of at least 7 percent of risk-weighted assets. That stance drew support from House lawmakers from both sides of the aisle.

“It is my hope that today’s hearing will demonstrate to the regulatory agencies the importance of appropriately tailoring these requirements to the different-sized financial institutions,” Representative Shelley Moore Capito, a West Virginia Republican, said in her opening statement.

Representative Carolyn Maloney, a New York Democrat, said U.S. regulators erred in proposing that the capital standards apply to small community banks when they were really meant for larger international institutions.

Industry’s Demise

“These rules could bring about the demise of the community banking industry within a decade,” William A. Loving, chairman-elect of the Independent Community Bankers of America, said in remarks prepared for the House hearing. “Unnecessarily high capital requirements are simply not viable for community banks because we have extremely limited options for raising new capital, unlike our larger competitors.”

The Basel standards were adopted by the international panel of regulators to help protect banks against a repeat of the global credit crisis that peaked in 2008. U.S. officials, responding to complaints that their proposal would unduly burden community lenders, told Senate Banking Committee members at the Nov. 14 hearing that smaller banks’ concerns will be considered as they craft rules.

“There is a good case for applying a more simplified risk-based capital regime than the Basel III rules for small community banks,” James M. Garnett, head of risk oversight at Citigroup Inc., said in remarks for the House hearing. “Federal banking regulators should reconsider the application of Basel III to traditional community banks that do not have complex balance sheets.”

‘Open Question’

Representative Jeb Hensarling, the Texas Republican who will take over as Financial Services Committee chairman next in January, said that it is “a very open question whether Basel III should apply to our community banks.”

Regulators are “thinking broadly about ways to reduce regulatory burden,” Comptroller of the Currency Thomas Curry said in an October speech. Smaller banks may be given longer transition periods and grandfather clauses to help ease them into compliance, Curry said.

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

Marc Jarsulic, chief economist at Better Markets Inc., said in his prepared statement that affected firms with less than $10 billion in assets should have some of the rules phased rather than getting an exemption.

‘Serious Risks’

“The proposed capital rules do not require banks to use nearly enough equity finance and will allow continued excessively high debt financing, which will continue to pose serious risks of runs,” said Jarsulic, whose Washington-based group promotes financial regulations.

The Fed, FDIC and OCC said this month that they won’t hold banks to a Jan. 1 deadline in the proposals for boosting reserves. The agencies are working “as expeditiously as possible” on the rules, they said in a statement.

The House hearing is also exploring the impact of the new standards on the insurance industry.

Kevin M. McCarty, president of the National Association of Insurance Commissioners, said in his prepared remarks that the federal government shouldn’t disrupt existing regulatory walls around insurers, which have long been regulated by the states.

“The prospect of bank-centric regulatory rules being imposed on or impacting insurance legal entities that have very different business models is quite problematic,” McCarty said.

Undermine Management

Instead of adding strength to insurance-based savings and loan holding companies, the Basel rules “may promote capital structures and practices that undermine prudential management of an insurance company,” according to Paul Smith, senior vice president and chief financial officer of State Farm Mutual Automobile Insurance Co.

“The proposed bank-oriented Basel framework would impose an ill-fitting and structurally flawed regulatory structure upon insurers, which have starkly different business models, risk exposures, and capital needs than banks,” Smith said in his prepared remarks.

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