WASHINGTON Federal Reserve Board Gov. Sarah Bloom Raskin on Thursday said regulators should move quickly to implement a robust set of capital and liquidity rules to avoid further uncertainty and costs for community banks.
Regulators jointly proposed the package of rules known as Basel III last June, but have indefinitely postponed implementation as the Fed, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency have sought to review and evaluate thousands of comment letters from community bankers raising concerns in the proposal.
"The framework has not been finalized, and I am concerned that significant, further delays could add to uncertainty and could detract from the maintenance of strong capital levels," said Raskin.
Basel III along with the Dodd-Frank Act were intended to raise the quality and quantity of capital to help prevent a repeat of the financial crisis.
Raskin acknowledged that the proposed rules by regulators were "not perfect" and would require some "meaningful modifications." She did not discuss what potential changes could be made.
The full package of rules will not be implemented until 2019; however banks must meet transitional deadlines along the way in order to adhere to the rules on time. Any further delays in adopting the rules could impose additional costs on banks, warned Raskin.
"Lending decisions and funding plans today are shaped by perceptions of business conditions in the future, and those conditions include the details of the final regulatory capital framework," said Raskin. "It seems obvious to me that uncertainty over the framework is weighing on the balance sheets of banks that will be affected by the rules."
Raskin emphasized the need for regulators to finalize the rules sooner than later, so that banks could begin to incorporate rules into their capital planning.
"At a moment, when the economy finally seems to be gaining some traction, I believe that finalizing a capital rule will minimize uncertainty related to capital requirements as well as promote safer and sounder banks," said Raskin.
Despite the necessity for stronger capital, she stressed the need for those requirements to be kept simple, especially for community banks, in order to be effective.
"Otherwise, we risk drowning banks in a capital adequacy system that is so complex that it both misses the mark of addressing meaningful emerging risks and piles regulatory costs on banks with no public benefit," said Raskin.
Raskin also addressed some of the weaknesses of a risk-weighted regime even as it provides some capital sensitivity to various asset classes.
"The riskiness associated with each asset class can be flat-out wrong," said Raskin. "Errors are going to occur in part because risks can change over time and in part because no one has perfect knowledge about the nature of risks associated with every single asset class."
U.S. regulators have traditionally offset such shortcomings by imposing a leverage ratio. But Raskin warned of the challenges of setting the ratio appropriately given the risk of over simplification, especially for larger, more complex institutions which also engage in off-balance-sheet activities.
She also cautioned over the difficulty in finding a perfect solution by regulators.
"While we attempt to craft a risk-based system that makes sense from the perspective of safety and soundness, we have to resist the temptation to believe we can create a perfectly sensitive risk-based regime that gives the illusion of safety," said Raskin.
While Raskin didn't weigh in on the appropriate approach for large banks, she suggested that for community banks it should not be significantly complex.
"The risk-based capital ratios should provide a rough baseline benchmark for ensuring that sufficient capital is held relative to a bank's risk profile, and the leverage ratio which has certainly stood the test of time serves as an effective backstop to reduce the risk that a bank would allow its balance sheet to become overleveraged," said Raskin.