Basel Burden On Small Banks Faces Scrutiny At U.S. House Hearing

U.S. community banks and insurers will press their case for separate treatment from the biggest financial firms as House lawmakers examine the potential impact of international capital rules at a Washington hearing today.

Industry executives are scheduled to testify along with regulators before two House Financial Services panels after a Nov. 14 Senate hearing that focused on efforts to implement standards adopted by the Basel Committee on Banking Supervision.

The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. proposed a U.S. version of the Basel rules in June, calling for all banks to maintain “loss-absorbing capital” of at least 7 percent of risk-weighted assets and setting new weightings for mortgages, commercial real estate, sovereign debt and securitizations.

“These rules could bring about the demise of the community banking industry within a decade,” William A. Loving, chairman- elect of the Independent Community Bankers of America, said in remarks prepared for the House hearing. “Unnecessarily high capital requirements are simply not viable for community banks because we have extremely limited options for raising new capital, unlike our larger competitors.”

The Basel standards were adopted by the international panel of regulators to help protect banks against a repeat of the global credit crisis that peaked in 2008. U.S. officials, responding to complaints that their proposal would unduly burden community lenders, told Senate Banking Committee members at the Nov. 14 hearing that smaller banks’ concerns will be considered as they craft rules.

‘Good Case’

“There is a good case for applying a more simplified risk- based capital regime than the Basel III rules for small community banks,” James M. Garnett, head of risk oversight at Citigroup Inc. (C), said in remarks prepared for the House hearing. “Federal banking regulators should reconsider the application of Basel III to traditional community banks that do not have complex balance sheets.”
The House hearing may also explore the impact of the new standards on the insurance industry.
Kevin M. McCarty, president of the National Association of Insurance Commissioners, said in his prepared remarks that the federal government shouldn’t disrupt existing regulatory walls around insurers, which have long been regulated by the states.
“The prospect of bank-centric regulatory rules being imposed on or impacting insurance legal entities that have very different business models is quite problematic,” McCarty said.
Instead of adding strength to insurance-based savings and loan holding companies, the Basel rules “may promote capital structures and practices that undermine prudential management of an insurance company,” according to Paul Smith, senior vice president and chief financial officer of State Farm Mutual Automobile Insurance Co.

Flawed Structure

“The proposed bank-oriented Basel framework would impose an ill-fitting and structurally flawed regulatory structure upon insurers, which have starkly different business models, risk exposures, and capital needs than banks,” Smith said in his prepared remarks.
Regulators are “thinking broadly about ways to reduce regulatory burden,” Comptroller of the Currency Thomas Curry said in a speech last month. Smaller banks may be given longer transition periods and grandfather clauses to help ease them into compliance, Curry said.
“We do not want to create a situation where the compliance costs make them uncompetitive or unable to serve their important roles,” George French, deputy director for policy in the FDIC’s risk-management arm, said of community banks at the Senate hearing.
Federal regulators said this month that they won’t hold banks to a Jan. 1 deadline in the proposals for boosting reserves. The agencies are working “as expeditiously as possible” on the rules, they said in a statement.

Bloomberg