Washington Must Keep Community Banks in Loop on Basel

The Basel Committee on Banking Supervision has a legitimacy problem.

The Committee has no formal legal existence tied clearly and directly to elected authorities, and its standards do not carry the force of law or treaty. The Committee’s closed proceedings are not documented and published for the sake of posterity. Despite these facts, this unaccountable, powerfully influential, opaque body has prescribed an increasingly steady stream of standards for internationally active banks over the last two decades.

These standards, which can have an enormous impact on bank customers and national economies, are then adopted by member jurisdictions. Increasingly, the people affected by Basel’s actions are wondering – and for good reason – who are these guys?

In the U.S., the legitimacy issue came to a head with the Basel III capital rules. Even though the Basel standards are designed and intended for large, internationally active banks, U.S. regulators are increasingly pushing them down to even the smallest banks. The Basel III capital standards are the clearest example, but others such as Basel III liquidity standards, have been pushed down to at least some non-internationally active banks. While the final U.S. version of the Basel III capital rules included some concessions to community banks, many bankers remain frustrated with the rule’s restrictions on Subchapter S institutions, the harsh treatment of mortgage servicing assets and the heavy compliance burden as banks retool systems for the new capital rules.

To its credit, the Basel committee does issue proposals for comment. Unfortunately, because the rules are ostensibly intended to harmonize regulation for institutions that compete at the global level, the vast majority of U.S. banks are unaware of the committee’s proposals and do not participate in the international process. No surprise, then, that the final international Basel capital standards were formed with no input from much of the banking industry and virtually no input from affected bank customers who could see significantly higher costs for banking products and services.

When U.S. regulators exposed their formal U.S. Basel III capital proposal for public review, thousands of comment letters were filed, expressing tremendous perplexity and even outrage. These letters, from U.S. banks of all sizes, expressed dismay at the bewildering details of a proposal negotiated by mostly foreign regulatory experts who are largely unfamiliar with the unique American banking system. State banking regulators from all 50 states were joined by members of Congress on both sides of the aisle who were quick to raise serious concerns during the U.S. rulemaking. Public doubts were raised about the utility of the Basel exercise, and some called for ending U.S. participation.

We believe proposals to end U.S. participation in the Basel Committee are misplaced. After all, the Basel Committee offers the best chance to achieve international harmony on key principles of bank supervision, and U.S. regulators approached the Basel process to promote standards that would benefit the U.S. financial system.

But to preserve and enhance the value of this Basel effort, the banking agencies must seek out the views of the full range of U.S. banks – and do so early and often.

Engaging with banks of all sizes and types as a prelude to Basel discussions in future rulemaking – and throughout the process – would ensure banking agencies can make the most informed decisions. In the end, such efforts would serve to bolster the legitimacy of, and U.S. participation in, the Basel Committee.

Fortunately, the U.S. already offers a legitimate process that banking agencies can rely upon: Clearly presenting the plans and scope of a Basel exercise to the public using an Advanced Notice of Proposed Rulemaking. This process allows for broad public input on the clearly outlined goals of the discussion. In this way, banking agencies would find out more clearly where a problem lies before attempting to fix it.

Using an ANPR would also be consistent with past practice. In 2003, during the development of the Basel II international standard, the agencies issued an ANPR that clearly outlined scope, the potential regulatory requirements, and asked for comments so the regulators could "seek appropriate modifications" at the international level. As a result of this ANPR, every bank knew whether the Basel process would affect them, and with that information could choose whether to participate in the comment process.

As U.S. regulators prepare to discuss developing standards in Basel, they should have a clear understanding of whom the standard could apply to here, and that understanding should be shared by affected banks and their customers. The ANPR process would alert institutions that standards the Basel Committee is considering could apply to them, offering the critical opportunity to raise important issues publicly.

Knowledge is critical for participants in these discussions and for those who would be affected by them. If there is any chance that a Basel Committee standard could apply to community banks, U.S. regulators need to make every effort to consult with these institutions before agreeing to Basel standards. By including banks of all sizes in a public process, the regulators could bolster the legitimacy of the Basel Committee and make better rules that fit the diverse U.S. banking sector.

Hugh Carney is a senior counsel for the American Bankers Association.