Community Banks: Basel III Will Put Us Out of Business

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WASHINGTON — Hundreds of community bankers on Monday filed letters to regulators expressing despair over the hardships they will face under a proposal to implement Basel III capital and liquidity requirements.

In detailed letters to regulators, banks warned that the new rules, if unchanged, will effectively put them out of business.

"It seems that the proposed Basel III capital rules would unjustly penalize smaller banks for problems caused by the business practices of the very large banks," wrote Greg Krider, senior vice president and chief financial officer of the $378.7 million-asset First State Bank of Middlebury in Indiana. "We feel very strongly that the proposed rules could have dire consequences for community banks across the country, and would be detrimental to the economic recovery of our nation."

Community banks across the country have mounted a near revolt over a June proposal issued by the three banking agencies, enlisting state regulators and a majority of the Senate in an effort to force the regulators to change the plan.

The proposal has elicited an energetic response from bankers. A petition first circulated in July by the Independent Community Bankers of America calling for an exemption for smaller institutions has garnered nearly 15,000 signatures representing nearly 4,200 banks nationwide.

"This shows you that Basel III not only hit a nerve, it is seen as a real threat by community bankers to their ongoing viability," said Camden Fine, president and chief executive of the ICBA.

The proposal would require banks to hold higher capital levels, but more important, changes how capital is calculated. Among other things, it would change the risk-weighting for certain assets, which could have a significant impact on a bank's capital ratio.

Fine and others have been pushing bankers to also file individual comment letters detailing how their institution will be affected by the Basel III requirements. Letters were due Oct. 22.

As a result, the comment letters go well beyond the typical form letters that institutions often submit to weigh in on a plan. Instead, they provide more depth on how bankers will be affected.

James Smith, chairman emeritus of the $1.1 billion-asset Hawthorn Bank in Clinton, Mo., told regulators if Basel III is applied to his bank it would place the firm in jeopardy since it would require him to eliminate his bank's holdings of trust-preferred securities, which is currently included as part of the bank's core capital ratio.

"We have trust-preferred securities and if you proceed with Basel III as written you will probably put us on a list to be sold," Smith wrote in his Oct. 11 letter to regulators. "Eliminating trust-preferred takes capital out of our bank and therefore we will not be able to loan money and serve our communities."

Banks also expressed concern about a provision of the plan that would require unrealized gains and losses of available for sale securities to be accounted for when calculating capital requirements.

Ronald Bowden, the chairman and CEO of Iowa-Nebraska State Bank, wrote that once interest rates start to rise again, it could significantly hurt his capital position.

"Since our current interest rate environment is planted at all-time lows, most community banks show available for sale gains but the risk of an inevitable increase in interest rates, the risk of reduced capital by Basel III far exceeds any perceived benefits," Bowden wrote in the Sept. 25 letter. "As an example, if interest rates were to increase by 300 basis points, my bank's investment portfolio would swing from a current paper gain of $1 million to a paper loss of $5 million. This would drop my bank's Tier 1 ratio by 30% and place the bank in a stressed capital position."

Another major concern for community bankers is the higher risk-weighting that would be applied to mortgage loans, which they say will require additional capital and reduce credit availability to customers looking to buy homes.

"This is punitive for my bank and we would be forced to increase the cost of the credit to customers," William David Lacy, president and CEO of the $405.5 million-asset Community Bank and Trust in Waco, Texas, wrote in an Oct. 9 letter. "This situation would be just another small step in stifling mortgage lending nationwide. It does not help a community bank like mine, nor the United States as it tries to come out of one of the worst economic periods in our history."

The $112.7 million-asset First National Bank in Park Falls, Wis., pressed for an exemption to the proposed rule, especially when it comes to higher risk weights on the balloon mortgage loans they provide to their customers.

"At a time when we need the housing market to pick up, do we really want community banks to stop doing mortgage loans due to compliance issues and the difficulty in processing a mortgage loan?" the bank stated in a letter signed by its directors, loan officers and tellers.

Others joined the call for an exemption, saying large banks should be subject to more stringent rules.

"You cannot regulate Bank of America and the First State Bank of Sauk Centre the same way," wrote Scott Beuning, in an undated letter.

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Comments (7)
Could the irony be any greater, as Dodd-Frank would have never passed Congress without the backing of the Independent Community Bankers Association of America? How does Camden Fine keep his job?
Posted by gtownsend | Monday, October 22 2012 at 5:05PM ET
Weren't trust preferred excluded from Tier 1 under the Collins Amendment irrespective of Basel? - Harry Terris, data editor, American Banker
Posted by hterris1 | Tuesday, October 23 2012 at 8:24AM ET
Community Banks! Join the club! Small businesses and entrepreneurs, your principle clients, have also been put out of business by Basel II and III.


But, donΒ΄t worry, I am not giving up on making the bank regulatory establishment understand... and confess


http://subprimeregulations.blogspot.com/2012/10/i-am-not-giving-up-on-making-thick-as.html
Posted by Per Kurowski | Tuesday, October 23 2012 at 9:14AM ET
Oh the great myth resurfaces. Dodd Frank was passing. Nobody was stopping the freight train. ICBA at least remained at the table and got some concessions, tempering the overall impact of a bill that was never destined to do what was intended: rein in the TBTF group. Sadly, many folks only look at facts that support their position and ignore everything else. Perhaps a closer examination of all info would lead folks to different conclusions. How could anyone seriously think ICBA was for DF?

Basel III also does not do what is intended: require more capital for risky activities. It reshuffles the deck chairs on the Titanic institutions while keeping the community banks captive below.

Let's focus on all the facts and create solutions that fit the legit risks of banking. And let's stop ignoring facts because they don't agree with our positions.
Posted by ufcxl | Tuesday, October 23 2012 at 10:02AM ET
How can it be that the New York Fed, The US Treasury and the Federal Reserve favor the Large banks and not community banks... oh yea... they are all part of the same club.

Go figure... they allow the investment banks to convert the US Government into an investment bank of last resort and pull of the largest transference of incompetence in history, is a way toat reawrds their buddies and penalizes the banks that did the right thing from the beginning. It is time to get rid of the Federal Reserve currency manipulation.
Posted by kws | Tuesday, October 23 2012 at 6:16PM ET
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