State bank supervisors have joined the chorus of Basel II critics calling on federal regulators to take a go-slow approach to the proposed international accord.
Neil Milner, the chief executive officer of the Conference of State Bank Supervisors, warned in a letter to federal policymakers that the accord could speed industry consolidation because "capital reductions allowed under this proposal could place community and midtier regional banks at a real competitive disadvantage."
"With substantially lower capital requirements, larger institutions could acquire community and midtier banks without much cost involved by immediately lowering the acquired bank's required capital to a level that is allowed by Basel II banks," Mr. Milner wrote in a Sept. 7 letter to the federal banking and thrift regulators. "The lower capital requirements and the magic of the current Basel II mathematics promote the incentive for consolidation within the banking industry."
Mr. Milner urged that U.S. regulators not "hastily commit" to any agreement with their international counterparts when they meet on Oct. 3 in Switzerland to discuss Basel II.
The Basel II agreement would apply only to the roughly 20 largest U.S. financial institutions plus most overseas banks. But community banks have long complained that it gives big banks a leg up by allowing them to reduce reserves and free up more capital for loans.
A spokesman for the Federal Reserve Board, which has taken the lead domestically on Basel II, said the agency had received the letter but would not comment until it had a chance to respond in writing.
But Pamela Martin, the director of regulatory relations for the Risk Management Association, chided the state bank supervisors' trade group, arguing that it had been largely silent with its complaints until now, despite attending a recent interagency meeting to discuss the accord.
"They really don't know what's going on," she said, adding that federal regulators have been lagging on Basel II. "I still don't get what all this hoopla is about, but I guess trade associations need to issue press releases." The RMA is a trade group of lending and risk management professionals.
Talks on Basel II have been difficult since they began in 1998. A new draft of the accord was expected from the Fed in June, but interagency arguments over it have put it on hold indefinitely.
The agencies are moving forward on a separate agreement that would apply more risk-based capital requirements to all banks outside the Basel II process. Federal Deposit Insurance Corp. Chairman Don Powell has said his agency would vote in early October on the accord, but he has not provided details of the plan.
