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ICBA: Exempt Community Banks from Basel III Proposal

October 23, 2012, 08:00 AM

The Independent Community Bankers of America (ICBA) called on federal financial regulators to exempt community banks from proposed Basel III regulatory capital standards. In a comment letter to the agencies, ICBA wrote that it strongly believes that the Basel III standards should not apply to U.S. financial institutions with consolidated assets of $50 billion or less and that are not deemed to be systemically important financial institutions.

“Let us remember that community banks were not the cause of the financial crisis of 2008,” ICBA wrote in its comment letter. “Their simplified balance sheets, conservative lending practices, and common sense underwriting shielded their regulatory capital balances from the losses that heavily impacted the large, complex, internationally-active and interconnected worldwide financial institutions. Furthermore, Basel III was conceived as a standard that would apply only to the largest, internationally active banks so that, for instance, a large European bank would be subject to the same capital standards as its large banking competitor in the United States. It was never intended to apply to a domestic community bank.”

In its comment letter, ICBA wrote that applying Basel III proposals to community banks would represent a very large shift in their definition of regulatory capital, minimum capital requirements and risk sensitivities of these institutions, which will inflict irreversible damage on these institutions and the communities they serve.

The proposals would significantly erode community bank profitability and credit availability and drive community banks out of business, furthering industry consolidation.

ICBA noted that introducing the capital conservation buffer, new definitions for common equity Tier 1 regulatory capital, new risk weightings for assets such as residential mortgages and the timeline for adopting the new minimum capital levels present many expensive and unnecessary regulatory burdens for community banks.

Absent a total exemption from the proposed rules, ICBA advocated several modifications to Basel III to simplify the rule and better align the proposed capital standards to the unique strengths and risks of community banking. Among its modifications, ICBA called for regulators to:

  • Fully exempt banks under $50 billion in assets from the standardized approach for risk-weighted assets.
  • Reduce the proposed substantially 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) from the calculation of regulatory capital for banks under $50 billion in assets to avoid harmful and unnecessary volatility in capital adequacy.
  • Continue the current Tier 1 regulatory capital treatment of trust-preferred securities issued by bank holding companies with consolidated assets between $500 million and $15 billion to reflect congressional intent.
  • Exempt all thrift holding 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.
  • Allow mortgage servicing assets to be subject to the same higher deduction thresholds that apply under current rules as they do not pose a risk to community bank capital.
  • Exempt community banks from the provisions of the capital conservation buffer
  • Make accommodations to ensure that Basel III and the standardized approach do not negatively impact the nation’s minority banks.
  • If Basel III and the standardized approach are to apply to community banks, then they should also apply to credit unions to limit their competitive advantage.

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