Wayne Abernathy's article in the American Banker in which he argues Congress should be more involved with Basel III is right on point. Congress has a clear right to know what the impact of such a major piece of regulation will be on the availability of credit and the viability of community banks.
It should have been involved in the analysis of the regulation from the beginning. However, the Independent Community Bankers of America believes Congress should go one step further and call for a complete exemption from Basel III for banks with under $50 billion in consolidated assets.
Abernathy's arguments appear to lean in that direction when he correctly points out that the Basel Committee originally conceived of Basel III being a standard for all global banks involved in international commerce and that it was not intended to be a one-size-fits-all plan for community banks in Wisconsin, Texas or Alabama. However, he never comes out and says community banks should be exempt. Instead, he argues that Congress should study the issue further and determine the impact of the proposal on all banks.
While ICBA certainly supports further study and analysis of the proposal, we hope that Congress will come to the conclusion that Basel III is regulatory overkill for community banks, and that it should never have been proposed for financial institutions that have no international exposures or that are not of a certain size.
The rules are way too complex and the punitive alteration proposed for risk weighting residential mortgages, for example, could single-handedly wipe out community banks that depend on residential lending to serve the needs of their communities. Including Accumulated other comprehensive income as regulatory capital not only makes the rules difficult to comply with quarter by quarter and makes regulatory capital volatile, but also puts community banks at a disadvantage to the larger banks since larger banks have the resources to mitigate the volatility with interest rate hedges. This will force many community banks to merge or consolidate with other banks.
Congress has many reasons it should be unhappy with the regulators over the Basel III proposal. As Wayne points out, they were not consulted about many aspects of the proposal, including the higher risk weights for balloon mortgages and second mortgages. Additionally, in some areas, such as with the phase-out of Trups, they completely ignored the intent of the Collins Amendment and called for the phase-out of the tier one treatment of Trups for bank holding companies with consolidated assets between $500 million and $15 billion and by mutual holding companies.
Let us remember that community banks were not the cause of the financial crisis of 2008. Their simplified balance sheets, conservative lending practices and common sense underwriting shielded their regulatory capital balances from the losses that heavily impacted the large, complex, internationally-active and interconnected worldwide financial institutions.
ICBA has a petition signed by nearly 15,000 persons requesting the banking regulators to exempt community banks from the proposed implementation of Basel III in the U.S. We hope that Congress will also urge the regulators to exempt community banks from Basel III.
Christopher Cole is senior vice president and senior regulatory counsel for the Independent Community Bankers of America.