WASHINGTON - Under a new industry proposal, capital requirements at small financial institutions would not change when the Basel Committee on Banking Supervision revamps the international standard.
The plan, pitched to regulators at a closed-door meeting last month, would make a significant departure from current plans by giving banks a third, status-quo option.
To date, as regulators have worked to revise the 1988 Basel standard, they have envisioned giving banks two choices. The new, Basel II rules would be used by the nation's largest, most internationally active banks, while all other banks would use a simpler version, commonly referred to as Basel 1A.
Regulators are expected to release a working draft of Basel 1A this fall, but so far the industry does not know how broad the changes to existing rules would be. This is one of the reasons community bank officials are pushing to give bankers the opportunity to simply stick with the original Basel approach.
"If you are a privately held bank, already well-capitalized, you may not want to take the extra steps and spend the time and resources to do the extra calculations," said Karen Thomas, the executive vice president of the Independent Community Bankers of America. "We had some bankers suggest that there should be a shortcut first step so that if you are highly capitalized, you don't need to do the rest."
Ms. Thomas and several other people who attended the meeting, which was held at the Federal Reserve Board's office here, said regulators appeared to be in "listening mode," and did not endorse or dismiss the idea.
"I didn't hear them say, as they did to other approaches, that it was inconceivable," said Rob Strand, a senior economist at the American Bankers Association.
Since negotiations to rewrite regulatory capital requirements for big banks began in 1998, bankers and regulators have continually sparred over how broad the rules should be and how changes might affect competition among banks of various sizes.
Banks adopting Basel II are expected to be ready by 2007, when they would run both the new and old capital standards during a one-year trial to iron out problems. Basel II is scheduled to be fully implemented by 2008, but that time frame could slip because so many details have yet to be determined.
Basel II is designed to improve on the original accord by aligning capital requirements closer with the internal models banks use to measure risk. To do this, banks have created massive loss databases to help them measure which business lines should require more capital than others. Also, banks will be required for the first time to hold capital against operational risk, which could include things such as technology malfunctions or internal fraud.
Basel 1A is expected to add some risk-sensitivity elements to the original accord without requiring the technology investment needed for compliance with Basel II.
For example, regulators are considering varying capital requirements for residential mortgages, depending on the loan-to-value ratio, said Kathleen Marinangel, the president and chief executive of McHenry Savings Bank in Illinois, who is on the board of America's Community Bankers.
Several studies have shown that Basel II could give larger banks a competitive advantage over smaller ones if the original accord is not updated, because with lower capital requirements, big banks could set their prices lower.
Last week's proposal, whose main proponent is the ICBA, would create a third option for banks, which could opt out of the Basel 1A standards if regulators agreed they were well-capitalized. Ms. Thomas said she could not predict how many banks might prefer the status quo.
But Hugh Kelly, a principal in the bank regulatory advisory practice with KPMG LLP, said the option could appeal to thousands of small banks. (Roughly 4,000 banks have less than $100 million of assets.)
"When they look at it and do a cost analysis, it's more burdensome than any sort of capital relief will outweigh," said Mr. Kelly, a former Office of the Comptroller of the Currency official. "The idea of a trichotomy makes a lot of sense, in that there will be a large number of community banks that are, quite frankly, well-capitalized and aren't worried about the competitive disadvantages, at least right now."
The agencies would not discuss the idea. But high-level staff members heard the pitch, including Roger Cole, a senior associate director at the Fed, and William Stark, an associate director at the Federal Deposit Insurance Corp.
Some experts predicted the agencies are too far along in the negotiating process to accept a third option.
"It's way too late to try a three-tiered approach now, when the two-tiered approach was complicated enough," said Andrew Kuritzkes, a managing director at Mercer Oliver Wyman in New York, who advises banks on Basel II preparations. "The banks that wind up under the old regime would be regulated under very outdated, outmoded concepts."
But the idea's odds are improved by the fact that two new regulators are joining the negotiations.
John C. Dugan was sworn in Thursday as the new comptroller of the currency, and John M. Reich is expected to be sworn in today as the new director of the Office of Thrift Supervision. Both expressed concerns about the Basel II process during their Senate confirmation hearings last month.
"New people are going to have to be briefed, and there will be new ideas," said Charlotte Bahin, ACB's senior vice president for regulatory affairs. "We'll see what happens."
The Basel Committee on Banking Supervision designed Basel II as a three-tiered standard, with a basic, standard, and advanced approach. However, in the United States, regulators decided to implement only the advanced approach.
