Community bank advocates are pressing federal regulators to count contracts for core deposits as capital just the way they let larger banks count other intangible assets such as purchase mortgage servicing rights and purchase credit card receivables.
Under the contracts a bank pays a fee to guarantee that a third party will buy core deposits for a fixed price. Currently the established value of those deposits must be deducted from capital, but community bank advocates argue that by establishing a minimum value through the contracts, the bank is creating an asset akin to other intangibles that large banks get to treat as capital.
"Core deposit intangibles arise in virtually every bank deal that is ever done," said H. Rodgin Cohen, a partner with the law firm of Sullivan & Cromwell LLP in New York. A change in the capital rules would benefit community banks "because they are not in a position to take advantage of the other types of intangibles: mortgage servicing rights or credit card intangibles."
Mr. Cohen said community bankers should strike now because regulators are rewriting capital rules. "It seems appropriate since there is now a reexamination" and an attempt "to create a structure for smaller institutions," he said.
The Independent Community Bankers of America supports the change, said Christopher Cole, a regulatory counsel for the group.
"I think they'll listen to the argument and I think they will go along with including the intangible deposits," Mr. Cole said of the regulators. Still, he said, the change would only affect about 100 banks.
"It is a big issue with the guys who have done a lot of branch acquisitions," Mr. Cole said.
Mr. Cohen agreed the impact would initially be limited but said more banks would buy options contracts for deposits if there were a capital benefit. (These contracts never require banks to sell the deposits; they just have the option to do it.)
Regulators are pursuing a two-pronged revision of the Basel accord, a risk-based framework put in place in 1988 by the major industrialized countries.
About 10 years ago the banking agencies began work on an update of those rules, which has become known as Basel II. It would apply only to the largest, most internationally active banks, and that led some smaller banks to question whether they would be held to a tougher standard and put at a competitive disadvantage. So regulators are working on a companion revision, known as Basel IA, for smaller banks.
They issued an advance notice of proposed rulemaking in October 2005. In a comment letter the American Bankers Association said core deposit intangibles should be given the same treatment as the other two intangibles that get capital credit.
Robert W. Strand, a senior economist with the ABA, said in an interview May 26: "They have an established market value and it seems like it makes sense. Just like you could sell a security, it has an established market value."
John R. Madden, the chairman of the $392 million-asset F.N.B.C. of La Grange Inc. in La Grange, Ill., said in his comment letter that core deposit intangibles should be counted as capital and that they are less risky than the other two other kinds of intangible assets.
"Doing so would be the most effective way to accomplish the two primary objectives of the ANPR - to eliminate potential competitive inequities between Basel II and general banks and to more accurately align capital with risk."
