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Basel III Will Force Small Banks Out of Mortgages

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Greg Gonzales, commissioner of the Tennessee Department of Financial Institutions, is right on point in his recent editorial on Basel III that "risk-based capital has limited value for small banks" and that the regulators should consider ditching the Basel III proposal for all but the largest banks. 

When it comes to risk management, I know of few community bankers who would assign a risk weight for their balloon mortgages at double the rate of their other first mortgage liens or who would assign a risk weight of 150% on loans that are on nonaccrual status, particularly when those potential losses have already been accounted for.  Neither would a community bank track loan-to-value ratios on its residential mortgages and risk weight them based on different LTV categories.

Not only is the Basel III complex system of risk weights quite foreign to community banks, it would also be a regulatory nightmare to comply with and would actually discourage certain kinds of lending.  For instance, the very narrow definition of a Category I mortgage under the proposed standardized approach will force many community banks to abandon these products for their customers. 

Because community banks do not have the resources to tackle asset-liability management with traditional 30-year fixed mortgages, a great number of community banks will be forced to exit the residential loan business altogether. Community banks, their customers, their communities and the housing economy will suffer as a result.

Community banks are especially concerned with the treatment of balloon mortgages, particularly when the bank regulators have never presented any evidence that they are significantly riskier than the traditional 30-year fixed mortgages.

Gonzales is right: Basel III is regulatory overkill for all except the largest, internationally active banks. If the agencies want to raise capital requirements for community banks, they should do so outside of the Basel III process and through a much more simplified system of risk-weighted assets that would be similar to what community banks currently use and that would actually track the way a community bank manages its risk. 

Otherwise, the introduction of a capital conservation buffer, new definitions for common equity Tier 1 regulatory capital and the new risk weightings for residential mortgages will present many expensive, complex and unnecessary regulatory burdens for community banks that will contribute little or nothing toward improving the strength and stability of the nation's community banks.

Christopher Cole is senior vice president and senior regulatory counsel for the Independent Community Bankers of America.

 

 

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Comments (2)
That is what we have said all along. If regulators want more capital, just say so.
The ICBA has had that attitude all along as well.
Posted by small banker | Monday, March 18 2013 at 4:43PM ET
I can't give a %, but Balloon Mortgages are riskier than the cookie cutter type of Mortgage. How much riskier is hard to say, but I have been in this business long enough to know this to be true. Much depends on whether credit is generally available and at what rates Mortgagors can refinance their Balloons. If the credit markets are tight and rates are also high, Balloon Mortgages can obviously be in a riskier situation.
Posted by robrose | Monday, March 18 2013 at 7:39PM ET
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