The proposed Basel III regulatory capital standards impose an unfair burden on community banks.
In testimony before a U.S. House Financial Services subcommittee last month, community banks argued for separate treatment, following similar testimony at a Nov. 14 Senate hearing. Regulatory capital standards adopted by the Basel Committee on Banking Supervision – the so-called Basel III standards – would require all U.S. 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 essence, this means a bank must consider these types of loans as riskier, and create a bigger capital cushion as a result.
The rules have an outsized impact on small banks, but are especially burdensome for mutual banks, which make up about 75 percent of Massachusetts’ community banks.
Mutual banks lack access to national credit markets, and are often unable to raise new capital. To increase the capital-to-assets ratio demanded by Basel III, many mutual banks would be forced to reduce the number of loans they now make. Such actions would be deleterious to their mission as banks, and contrary to the Federal Reserve’s efforts to encourage banks to increase lending.
Basel III, if imposed in its current form, will harm community banks, their customers and communities in Massachusetts. It will also encourage further consolidation of the banking industry. And because community banks are historically the major lender to small businesses, entrepreneurs and family-owned businesses will find it even harder to obtain loans.
Community bank officials, as well as House Republicans and Democrats, agreed at the recent subcommittee hearing that regulators erred in proposing that the capital standards apply to small community banks.
Large, complex international institutions deserve additional scrutiny and strengthened capital requirements. But the more than 200 community banks in Massachusetts – all locally owned, with directors who live in the towns and cities served by those banks – do not.
They did not engage in the practices that led to the mortgage meltdown and Great Recession, and should not be penalized for the sins of banking behemoths. Applying the same capital rules to community banks as larger financial institutions will undermine the viability of community banks in Massachusetts and throughout the nation.
Implementation of Basel III has been delayed from its original Jan. 1 deadline. But so far, regulators still maintain that although they are studying the concerns of local banks, the benefits of Basel III outweigh the costs of compliance.
The goal of Basel III is admirable: ensuring that the nation’s largest banks have adequate capital under a worst-case economic downturn. But in applying a one-size-fits-all solution to the issue of capital adequacy, regulators threaten to impose unfair requirements on community banks.
In testimony before Congress, William Loving, chairman-elect of the Independent Community Bankers of America, warned that the standardized approach of Basel III’s proposed capital rules would bring about the demise of the community banking industry within a decade. Nearly 15,000 individuals have signed an ICBA petition urging banking regulations to provide an exemption for banks with assets of less than $50 billion.
In Massachusetts, where mutuals make up the majority of community banks, the imposition of unreachable capital standards would be a death knell for the commonwealth’s community banking industry.
Basel III capital standards should not apply to community banks.
