Lawmakers Increasingly Skeptical of Basel III Plan

WASHINGTON — A top senator on Tuesday introduced a bill that would effectively call on banking regulators to stop and study the impact of Basel III capital rules before implementing a final rule.

Sen. Richard Shelby, R-Ala., a top member of the Senate Banking Committee, introduced the bill in order to assess whether the capital requirements U.S. regulators signed off on as part of the Basel III accord appropriately balance the need for banks to have higher standards while not disabling their ability to lend and support economic growth.

"Congress needs a detailed analysis of current and new capital rules to ensure that taxpayers are protected unduly impeding bank lending or economic growth," said Shelby in a press release. "Only a comprehensive examination of the impact on financial institutions large and small will meet this need."

Shelby has previously asked regulators to provide a detailed analysis of the capital rules, but they have yet to do so.

A spokesman for the Federal Reserve and the Office of the Comptroller declined to comment.

Michael Gibson, director of the Fed's division of banking supervision and regulation, told lawmakers last November that each of the federal banking agencies have already prepared an impact analysis on the proposed requirements. The Fed's analysis showed that the majority of banks would not have to raise additional capital because they already meet the proposed minimum standards. Additionally, 90% of community banks have sufficient capital to meet or exceed the proposed buffers.

Separately, the Basel Committee has done its own cost-benefit analysis on the impact of the changes on banking organizations and the financial system, where it found that the benefits far outweigh the compliance costs to the industry and any costs to the macroeconomy.

The bill would examine a number of issues, including whether the proposed rule would cause capital levels to fluctuate more frequently; if total risk-weight asset levels would increase or decrease; or whether the rules would cause banks to discontinue using certain risk-based management tools.

Lawmakers have been troubled by the package of rules that the Basel Committee on Bank Supervision agreed to adopt in December 2010, especially as it applies to community banks.

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, echoed that skepticism in a speech to bankers on Tuesday.

"Basel III is suspect, and especially suspect for our community financial institutions to whom the burden will fall most heavily," said Hensarling, speaking at the annual American Bankers Association conference on Tuesday. "Community financial institutions, not unlike any financial institutions, need prudent capital standards. They do not need onerous capital standards, and they do not need complex capital standards, and they certainly don't need capital standards that further institutionalize competitive disadvantages to our large money center banks."

The lawmakers' comments came on the same day that senior officials from the Fed and the FDIC sought to reassure bankers that regulators were closely listening to concerns aired on the package of rules and would work to address those concerns.

"I can assure you that we are paying attention to those comments and we will do what we can to address those issues," said Fed Gov. Elizabeth Duke, at the ABA conference.

She said the agencies are still in the process of finalizing capital regulations and remain hopeful "we will get those rules out soon. I know you are all waiting to find out what the capital regulations will be so you can make your business plans."

Regulators received roughly 2,000 comment letters, mostly from community bankers, as part of their June proposal to implement the Basel III accord. The top three issues that have worried community banks are the capital risk weights put forth for mortgages, how the value of certain securities — known as accumulated other comprehensive income — affect required capital levels and the treatment of trust-preferred securities.

"All three of these issues are the focus of a lot of attention by the regulators, and I think it's our hope that we can be responsive," FDIC Chairman Martin Gruenberg said earlier in the day at the same conference. "I don't want to say more than that at this point, but we're paying a lot of attention."

Duke also addressed a separate issue related to Basel III that has been gaining greater attention — potentially increasing the leverage ratio in lieu of risk-based capital.

Unlike supporters of such an idea, including FDIC Vice Chairman Thomas Hoenig and board member Jeremiah Norton, Duke said risk-based capital ratios are an important metric.

"I'm of the personal opinion that risk-based capital makes more sense than capital ratios that are not risk-based," said Duke. "That being said, there are some levels of capital that with an absence of risky assets maybe would be an absolute backstop for the losses."

Norton and Hoenig are both advocating that regulators take a second look at the leverage ratio before finalizing the package of rules. They are calling for a significantly higher leverage ratio beyond the 4% that was proposed in June. They argue that the ratio is insufficient to protect the banking system, noting that banks held just 3% in tangible equity to total assets prior to the financial crisis. (The largest banks also face an additional 3% supplemental leverage ratio.)

Norton raised the issue in February when he suggested that U.S. regulators should consider tangible common equity and Tier 1 common equity when establishing a leverage ratio requirement. He said that the current Basel III proposal relies too heavily on risk-weightings that do not adequately capture risk.

"There is a case to be made we would benefit from a higher leverage ratio," said Norton, in a recent interview. "Directionally, I think, it should be significantly higher than 3%. We should have a process that everybody can weigh in. I think that's a reasonable way to go about it."

He proposed that policymakers review it while they are weighing industry comments, and said it wouldn't take too much time for regulators to revamp the ratio if desired.

Hoenig, on the other hand, is calling for a tangible capital ratio of 10% with items like tax-deferred and goodwill excluded from the calculation.

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