Change Basel III or More Small Banks Will Vanish: AB Panel

WASHINGTON — Regulators should take immediate steps to ease proposed capital requirements for community banks, or risk shrinking their ranks further, bankers and analysts said Friday.

"There needs to be some discrimination here against size and complexity of the organization," Frank Sorrentino III, chairman and chief executive of North Jersey Community Bank (NJCB), said at American Banker's Regulatory Symposium in Arlington, Va. on Friday.

"You're going to start having banks that don't make certain lending decisions or don't make certain types of loans," he said.

Last month, community bankers won more time to voice growing concerns over a set of proposals that would enact Basel III capital and liquidity requirements for all institutions. The banking agencies said they will provide an additional 45 days of public comment on their June proposal with a new deadline of Oct. 22.

Community banks are hoping the extra time will help to amass support within Congress and elsewhere to soften the proposal and lessen its impact, but panelists on Friday warned that the task is still a difficult one.

"The problem is they genuinely believe in the community bank mission but then they want to regulate community banks so they can never fail. And those are two incompatible goals that have yet to be reconciled," said Karen Shaw Petrou, managing partner at consultancy Federal Financial Analytics.

The proposal by U.S. regulators effectively adopts international capital standards set by the Basel Committee on Banking Supervision, which are designed to prevent a repeat of the financial crisis.

For the most part, small banks had expected the majority of the Basel III plan, which dictates the quality and quantity of capital institutions, to apply to them, including a requirement that they hold 7% in Tier 1 common capital.

But the proposal upped the ante for the roughly 7,000 smaller institutions by changing the risk-weighting calculation for certain assets, including U.S. government securities, corporate exposures and residential mortgages. Community banks had expected they would be allowed to stick with an earlier version of the Basel accord, which was initially adopted in the late 1980s.

Bankers frequently ask whether regulators seriously weighed the impact of these rules on smaller institutions, starting at the Basel III negotiations.

"This is somewhat of a self-inflicted wound, because they boxed themselves in by virtue of the commitments they made in Switzerland," said Paul Saltzman, president of the Clearing House Association. "…The reality is you don't have a pure [notice of proposed rulemaking], because you have this overarching framework that was previously agreed to."

"U.S. credibility is at stake here because of the failure to implement Basel II," Saltzman said. "Now they're faced with a situation where I think they're sympathetic with our issues and they're trying to spread the circle between those commitments and what I think are legitimate policy concerns," he added.

Regulators' hands are tied more by the Dodd-Frank Act than by Basel III itself, others say.

"The shock and awe and surprise by community banks as to the applicability of Basel III I think can be traced back most specifically to the Collins amendment of Dodd-Frank," said Luigi De Ghenghi, a partner at Davis, Polk & Wardwell LLP.

"Because it's the Collins amendment, not Basel III, that requires all depository institution holding companies and all depository institutions to be subject to the same generally applicable capital and leverage standards. And that implies that there's one set of standards that applies across the board to everyone," he added.

On Thursday, Federal Reserve Board Chairman Ben Bernanke said community banks would be spared from some of the accord's stricter requirements.

"It's not a one-size fits all," Bernanke told reporters following a two-day Federal Open Market Committee meeting. "Indeed, many of the most difficult, complex regulations apply only to the largest and most complex institutions."

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