The most recent election cycle has brought a host of changes to the Bay State, but for community bankers, the political turnaround in Washington, D.C. is less of a concern than proposed Basel III regulatory capital standards.
On the political side, Newton Democrat Barney Frank – co-author of the Dodd-Frank Act – is retiring from Congress after 22 years. Brookline Democrat Joseph Kennedy III is taking his place, and Democrat Elizabeth Warren, after ousting Scott Brown, appears poised to take a seat on the Senate Banking Committee.
Daniel J. Forte, president of the Massachusetts Bankers Association (MBA), told Banker & Tradesman, however, “From a macro perspective, I don’t think the national or state elections are really going to change the environment very much.”
Forte said the MBA would be planning sit-down meetings with Kennedy and Warren in the coming months to talk about issues that are important to Massachusetts bankers.
“We’ve had a good working relationship with [Warren] over the past few years when she advised the Consumer Financial Protection Bureau,” Forte said. “Even throughout the campaign, while she’s expressed concerns about some of the Wall Street firms and some of the larger institutions, she’s also expressed an interest in ensuring that local banks, community banks, are successful.”
But regardless of who’s in office, there’s a much larger issue looming in the minds of bankers everywhere: Basel III.
Abroad, European banks have asked for a one-year postponement of implementation of the Basel III rules, while Asian banks are urging regulators not to delay too long. Meanwhile, American banks have been offered a little breathing room, since the start date for Basel III was pushed into 2013, back from its original Jan. 1 deadline.
While most agree that the rules are fair for the megabanks that actually engaged in risky lending and caused the financial crisis, the overwhelming consensus among banking experts is that some of the provisions of Basel III could crush smaller, community banks and stifle lending in an already down economy.
‘Bricks On The Mule’
“You can only put so many bricks on the mule before the mule falls down. This is a huge brick that’s being put on the backs of a lot of small banks,” Needham Bank CEO and Chairman Jack McGeorge remarked. “I don’t think it’s going to affect Needham Bank significantly, but that’s not the point. It affects other community banks.”
The Independent Community Bankers of America (ICBA), a Washington-D.C.-based industry group, has lobbied aggressively for smaller banks to be exempted from all of Basel III’s capital standards. Of particular concern to Chris Cole, senior vice president and senior regulatory counsel at the ICBA, are the capital requirements and the way certain loans, like balloon mortgages and second liens, are weighted as riskier than traditional, “plain vanilla” loans.
Like many community bankers, John Korona, president and CEO of Mansfield Bank, worries that the Basel III capital requirements will limit the loans his bank can make.
“The perfect example is the first time homebuyer program, which according to some of the features of Basel III, would be a risky loan for us,” Korona said. “These loans are extremely important in our community, but Basel III would cause us to hold more capital for these.”
Another major concern is the inclusion of accumulated other comprehensive income (AOCI) in regulatory capital, which Cole says will further force smaller community banks to retain even more capital to compensate for volatile gains and losses when interest rates rise on Treasuries or municipal securities.
Those capital requirements would put particular stress on mutual banks, which cannot raise capital by simply selling more stock. And, community bankers say, that strain on the spread will in turn stifle hiring and innovation in other aspects of banks’ management.
Capital Squeezed
“Capital is king. If you don’t have the capital, you can’t grow, you can’t do research and development, you can’t produce new products, you can’t hire new people, you can’t give pay raises, you can’t expand your footprint. It’s just an added expense,” McGeorge said.
Failing a total exemption of banks under $50 billion from Basel III, the ICBA is pushing, among other modifications, for smaller banks to be exempt from the standardized approach for risk-weighted assets, for the exclusion of AOCI from the calculation of regulatory capital and for the higher-risk weights for balloon mortgages and second mortgages to be reduced to Basel I levels.
Cole brushed aside rumors that new Basel III rules would be released by the end of the year, and said he expects them sometime in January.
“The good news here is that during the two testimonies that we had before Congress, Congress was almost completely on our side on this matter and asked some tough questions of the regulators as to how they were treating community banks,” Cole said. “The community bank question was the overriding one. Just about every Congress member asked, ‘Why are you doing this to community banks?’ I’m optimistic that we’re going to get some changes.”
Email: lalix@thewarrengroup.com
