The start date for new regulatory requirements known collectively as “Basel III” has been pushed back from its original Jan. 1 deadline – a slight reprieve for banks. Perhaps even more encouraging, lawmakers at a recent hearing strongly voiced concerns about whether the new rules might crush community institutions.

But regardless of the extended deadline and the discussions at that recent U.S. Senate Banking Committee hearing, the specter of Basel III is still lurking out there.

“It’s what wakes me up in the middle of the night,” said Donald Gill, CEO of Weymouth-based S-Bank. Like many community bankers, Gill believes the new requirements will, at minimum, require a huge investment in extra programs and personnel to keep up with the financial reporting requirements outlined in the regulations.

But this isn’t just a matter that affects back-office procedures. The rules also place new capital requirements on institutions, which would be particularly damaging for mutual banks that can’t raise money through stock. At worst, he told Banker & Tradesman, they’ll make it nearly impossible for banks of his size to survive.

Of course, plenty of unknowns still surround Basel III. The proposed regulations were made public in the summer, and the comment period for the rules closed at the end of October, said Jon Skarin, senior vice president of the Massachusetts Bankers Association. The timeline for implementing all these rules stretches out over years into the future.

What is clear, however, is that they call for banks to maintain “loss-absorbing capital” of at least 7 percent of risk-weighted assets. In addition, the rules put new risk weightings on a variety of loans, such as commercial real estate and residential mortgages.

In practice, that means a bank must consider these types of loans as riskier, and create a bigger capital cushion as a result.

‘Outsized Impact’

Larger banks are better equipped to absorb these changes, but Skarin said these rules have an outsized impact on small and even regional banks. For community banks, these rules are unduly difficult – but for no one more than mutual banks, he added, which make up about 75 percent of Massachusetts banks.

In part because mutuals cannot sell stock to raise capital, Skarin said, they’d likely have to go on the defensive and simply stop making as many loans. That, of course, is completely antithetical to their mandate as banks, and also goes against politicians’ frequent exhortations to boost lending.

In addition, Basel III includes huge reporting requirements. Under the rules, banks would have to report loan-to-value ratios for their entire portfolios. The regulations call for information to be included on bank call reports that is, as of now, not captured anywhere else. There is no precedent for how to gather or report that information, and implementing the rules is extremely burdensome. Skarin called these requirements “enormous” and “a huge overreach.”

Joseph Hayes, CEO of Scituate Federal Savings Bank, agreed.

“[It’s going] to change the landscape of how we lend, and who we lend to,” he said.

The Basel III requirements, as written, simply shouldn’t apply to small banks, Hayes added. A $267-million asset institution like his is a totally different type of business than the megabanks that truly created the financial crisis.

It’s not inconceivable, however, that lawmakers will split the law to exclude community banks, Hayes noted. That has already happened with recent legislation, such as the Durbin Amendment, which required a cap on debit card swipe fees. After loud protests, the proposal was changed to allow institutions with less than $10 billion in assets to be exempt from the cap.

Skarin was not surprised at all that the Jan. 1 start date has been pushed back, as the original timetable was notably ambitious. Also, banks and their industry representatives have been vociferous in their criticism of the rules, Skarin said, which may have given regulators, and now lawmakers, pause.

Skarin said he’s sat on a number of conference calls between regulators and the banking industry, and for the topic of Basel III, those calls usually weren’t pleasant for the regulators.

“On some of [these calls], frankly, they got beat up pretty well,” he said.

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