WASHINGTON — A bipartisan group of 53 senators is calling on banking regulators to consider the impact that proposed Basel III capital standards will have on community banks.

In a letter to agency heads, the senators — who make up a majority of the upper chamber — stressed that proposed capital rules are too complex and expensive for smaller-sized institutions to comply with and will hurt their ability to lend to borrowers.

"We understand that capital is an important source of strength in our financial system," they wrote in a letter dated Thursday. "However, the complexity of new global rules adds little value to the community institutions which your agencies rigorously regulate and monitor. As you review these proposed rules, we respectfully request you consider these unintended consequences and their effect on the viability of community banks across the country."

The letter is likely to provide a large boost to community bank efforts to dial back the Basel plan. Lawmakers' views generally carry significant weight during a regulatory comment period, but a letter with this many senators, including members of both political parties, is rare. Among the signatories were several Senate Banking Committee members, including Sens. Mark Warner, D-Va., Mike Crapo, R-Idaho, Jon Tester, D-Mont., and Kay Hagen, D-N.C. 

The letter was spearheaded by Sen. Pat Toomey, R-Pa., and Warner.

Warner said in a separate press release that "smaller financial institutions offer unique services to their communities with much less institutional complexity.

"As regulators implement Basel III, we hope they will acknowledge these inherent differences," he said.

The letter also expressed concerns that the proposed rules would "exacerbate" funding challenges for small banks.

"Community banks have little or no access to capital markets," they wrote. "In most cases, they must rely on the bank's officers, directors and shareholders to raise additional capital. Raising capital for community banks in the best of times is challenging and nearly impossible in times of economic stress."

Senators also raised alarm about potential unintended consequences that could result from the proposal.

"Community banks may change their business plans as a result of the rules, thereby reducing lending and economic growth in the communities in which they serve," they wrote.

The letter was sent to Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corp. Acting Chairman Marty Gruenberg, and Comptroller of the Currency Tom Curry.

In June, the Fed, FDIC and OCC released proposals that would implement Basel III in the United States. The plans sparked outrage among community bankers, who argued that the changes, particularly how certain risk weights were calculated, shouldn't apply to smaller institutions. Since then, bankers have become increasingly outspoken to regulators during in-person meetings and on conference calls.

Regulators, including Bernanke and Gruenberg, have tried to provide assurance to community bankers that they would not put into effect a burdensome, onerous rule.

Gruenberg told American Banker's Regulatory Symposium that regulators are "very conscious" of concerns about how the Basel III rulemaking would affect community banks. They have held informational sessions around the country with bankers about the rules, and the FDIC has designated an expert in each of its regional offices to answer banker questions about the plans.

"Our intention here is to make this proposed rulemaking process as clear and as transparent as we can," Gruenberg said.

Fed Chairman Bernanke has also tried to assure smaller-sized institutions that the regulation would not be a "one-size fits all," saying that the toughest rules would only apply to the largest and most complex institutions.

"We're very interested and very focused on community banks at the Fed," said Bernanke. "We believe they play a very important role in our economy, in our communities."

Regulators, he said, are "trying to make sure that we take into account…community banks when we put out the final rule."

Regulators released a calculator on Monday that is designed to help community bankers project how much capital they will need to hold under Basel III.

The agencies are hoping banks can use the so-called "regulatory capital estimation tool" as they submit comments on proposals to implement Basel III in the U.S. The comment deadline expires Oct. 22.

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