WASHINGTON Community bankers are saying thanks but no thanks to a federal proposal to simplify capital rules for small institutions.
The reason? Though the plan would make admittedly complex standards less so, industry officials said in comment letters due last week, it would simultaneously force them to hold more capital and rejigger their internal systems a trade-off they do not find appealing.
A few modest changes in the capital standards might result in small savings in reporting burden, Paul A. Smith, senior counsel at the American Bankers Association, wrote in a letter to the banking and thrift agencies. But if at the cost of forcing every institution to incur major programming and systems modifications, it would fail to reduce real burdens.
Federal regulators in October proposed simpler alternatives for determining whether small, noncomplex banks and thrifts are adequately capitalized at the same time they are developing more flexible standards for large banks.
The plan spearheaded by Federal Deposit Insurance Corp. Chairman Donna Tanoue but jointly offered with the other banking and thrift agencies would apply to noncomplex institutions with less than $5 billion of assets. To qualify, these banks also would have to possess a simple, low-risk balance sheet and make minimal use of derivatives. Regulators say that 8,035 banks and thrifts controlling about 20% of the industrys assets would meet those criteria.
Three simpler alternatives for calculating capital were proposed: a standard capital-to-assets leverage ratio, a simplified risk-based ratio, and a modified leverage ratio that includes a risk-based element.
Existing rules require all banks and thrifts to have a 5% capital-to-assets ratio and a 10% risk-based capital ratio to be considered well capitalized. In making the proposal, regulators cautioned that the simpler framework might result in higher minimum requirements. But the agencies countered that many noncomplex institutions already exceed the minimum required capital levels.
Industry reaction was initially expected to be positive, but the 20 letters received by the agencies show that financial executives and several trade associations strongly oppose having to hold more capital.
Charles R. Adamson, president of $50 million-asset Missouri Federal Savings Bank in Cameron, wrote in a letter to the Office of Thrift Supervision that higher minimal capital requirements would be an odd reward for small banks that regulators say they want the help.
Once again, Mr. Adamson wrote, this is an overkill for those numerous small-town banks across the country that bear the brunt of and are subjected to the onerous regulations imposed by the agencies in their never-ending quest to keep the megabanks from going under.
Charlotte M. Bahin, director of regulatory affairs at Americas Community Bankers, said she understands regulators wish to cut red tape, she cautioned the agencies against replacing the currently workable system with a standard that is overly simplified, not risk-based, inflexible, and inadaptable to the nature and complexity of businesses conducted by a wide variety of community banks.
She advises that the agencies take a tip from the Basel Committee on Bank Supervisions recent attempt to tailor capital standards to individual institutions by lowering the risk weighting for several types of loans and other products.
Ms. Bahin said the proposal for small banks should lower the risk weighting in six areas: residential mortgage loans that have a loan-to-value ratio of 60% or less; commercial real estate loans that have a loan-to-value of 50% or less; collateralized commercial loans that have loan-to-value ratios of 30% or less; investments in certificates of deposits of $100,000 or less; collateralized consumer loans with a loan-to-value of 50% or less; and construction loans collateralized by presold versus speculative properties.
Kenneth A. Guenther, executive vice president of the Independent Community Bankers of America, wrote that small bankers are divided on whether a rule is needed at all, and which of the three options would be best. He urged regulators to let banks choose between staying in the current system or picking one of the others.