WASHINGTON - Federal Reserve Board Governor Laurence H. Meyer acknowledged Thursday that a federal proposal to simplify capital standards for most banks drew more complaints than regulators had expected, and hinted that small institutions could be permitted to keep operating under the current system.

"Community banks appear to have little interest in the advance proposal for noncomplex banks," Mr. Meyer said in a speech at a gathering of Ohio bankers. "The gains in simplicity were apparently not viewed as offsetting the costs of changing from the current set of rules to a purportedly simpler system. The intent of the proposal, by the way, was to reduce regulatory burden on smaller banks while ensuring that their capital remains at prudent levels."

The banking and thrift agencies offered the alternative system last fall to prepare for a new Basel Capital Accord proposed in January that would revamp capital standards for most large, complex banking organizations. Mr. Meyer reiterated that the agencies felt that there was no need for most banks with noncomplex balance sheets to comply with the revised Basel standards.

In their proposal, regulators offered three possible scenarios for simpler standards: a standard capital-to-assets leverage ratio, a simplified risk-based ratio, and a modified leverage ratio that includes some risk-based elements.

But industry officials argued in comment letters that shifting to new standards would be too costly for small banks, and that preserving the status quo for them while applying the revised Basel standards to large banks would make the most sense.

Mr. Meyer said that approach needs to be looked at carefully, and he indicated that he might support the idea. "The current standard appears to be working well for community banks," he said.

But he invited industry comment on what changes could be made to improve the current system, and knocked some of the critics for demanding capital breaks without corresponding tradeoffs.

"The few respondents … suggested reduced requirements on certain assets, such as low loan-to-value mortgages and certain collateralized consumer loans," Mr. Meyer said. "The difficulty is that the respondents did not also suggest which exposures, in turn, should get higher capital requirements. Simply cherry picking a bank's best assets to receive lower requirements is not workable."


Related Content Online

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.