Live concern echoes over 1,000 comment letters filed

Will the Basel III proposals mandate that community banks raise more capital? For most, no; for some, maybe, said Comptroller of the Currency Thomas Curry during a speech at ABA's Annual Convention.

"In most cases, we expect it to fall largely on institutions whose capital is lower or risks are higher than average-as should be the case for any minimum capital rule," said Curry. He pointed out that when regulators were preparing the three risk-based capital proposals, published in June, they analyzed the potential impact. That work indicated that there would likely be little impact on community banks and thrifts. (See the end of this article for a post-convention update from ABA Newsbytes, regarding a delay in the Basel III implementation date.)

Many bankers have indicated, after using one of several capital estimating guides, that they believe they have sufficient capital to comply-as things stand now. However, it is common for these bankers to point out that the difficulty of Basel III will lie in its impact on strategic choices, behavior, and flexibility going forward. Others will see trust preferred capital that had been grandfathered under the Collins Amendment phased out after all. Such banks may have to find alternate sources.

"We need to hear from you on this issue," Curry said. "We hope the estimator we published recently will help you assess this impact. And we need you to share the results with use." (Find ongoing updates and resources on ABA's Basel III page.)

Proposals aren't "foreign" to U.S. banks

Curry criticized characterizations of the agencies' proposals as European. ABA itself has taken a line in public appearances that the proposals ought to be revamped, in part to better adapt them to American banking. Curry clearly disagrees with this viewpoint.

"The agencies and the press have called it the Basel III NPR, which has fed the notion that we are importing standards invented in Basel and imposing them on community banks and thrifts here in the U.S. However, I believe some of the Basel standards are appropriate for banking institutions of all sizes and levels of complexity, and they belong in our rulemaking."

Curry cited an example, the exclusion from regulatory capital of any instrument that that can't be counted on when needed the most. He also held up the concept of capital buffers as sound. Does it matter, he suggested, where an idea originates, if it's a good idea?

Regulators "get it," says Curry

The Comptroller pointed out that rule writers had excepted community banks and thrifts from aspects of the proposals that they see as inappropriate for smaller institutions-one example being the counter-cyclical buffer that would be required of the largest banks.

Curry made a point of listing the regulators' efforts, in drafting and publishing the proposals, to minimize the burden on community banks. Breaking the matter into three sections was meant in part to isolate issues that only larger institutions would have to deal with. The two proposals touching on community banks were preceded by summaries--albeit long summaries of longer proposals--designed to save community bank executives time in reading the proposals.

Curry demonstrated his awareness of community bankers' strong feelings about the proposals and their desire to be exempted from them. He held out no hope that that would be the case, but he did indicate that further grandfathering and extended transition periods could be added as regulators revise the initial proposals.

"With respect to longer-term regulatory burdens, we hope that the comments we receive will help us refine our estimates of the system and procedures  costs that are likely to be associated with compliance," said Curry. "These are real costs, and if the comments reveal where the costs might be concentrated or what the rough overall cost implications might be, that would be especially useful."

He acknowledged that many community bank executives feel their institutions didn't cause the nation's crisis and therefore shouldn't be covered by such post-crisis rules.

"We need to keep in mind, however, " he said, "that over 400 community banks and thrifts have failed since 2008, and ultimately, they failed because they didn't have enough capital for the risks they took."

Down to specifics

The regulators' risk-based capital proposals are incredibly detailed, as are responses to them. ABA's main comment letter, for example, ran over 100 pages, with attachments. Here are highlights of Curry's comments on two hot issues:

• Treatment of AOCI (accumulated other comprehensive income): Many bankers worry that this will cause unmanageable volatility in regulatory capital requirements and Curry agreed an argument could be made for this view. "We have already received enough substantive comments on AOCI that I can promise you that we will be taking a very serious look at what our options are to address this conundrum once the comment period ends," said Curry.

• Impact on high-volatility CRE and residential mortgages: Curry's attitude came through loud and clear: "If ever there was an area where higher risk and higher capital should go together, this is it. This was a very clear lesson of the crisis."

However, he indicated that regulators now see that specific treatment of certain types of loans could cause hardship to community banks.

"Here again, it is essential that we strike a balance that addresses risk while minimizing burden," Curry said.

Update, excerpted from the November 13 ABA Newsbytes:

Agencies Announce Basel III Implementation Delay 


The three Basel III capital proposals will not become effective on Jan. 1, 2013, as originally planned because of "the volume of comments received and the wide range of views expressed during the comment period," the federal banking agencies said in a press release. 



The announcement shows how effective bankers have been in raising their substantive issues on the Basel III proposals, and it reflects the serious consideration the regulators are giving industry input that provides real-world information on the proposals' wide-ranging impact. 



The three agencies, which are legally required to read and consider all comment letters, have each posted about a thousand such letters on their websites and are processing more. ABA has encouraged all banks to submit comment letters focusing on how the proposals would affect their customers and services. 



Bankers' strong response--more than 1,000 letters--has far exceeded the usual number of comments for regulatory proposals. In addition, ABA joined with the Financial Services Roundtable and Securities Industry and Financial Markets Association to file a 181-page comment letter that echoes the issues individual banks raised, while discussing the proposals' many problem in great detail. 



The banking industry, which embraces the concept of adequate high-quality capital levels for all banks, has emphasized that the Basel III proposals go far beyond that by subjecting capital to volatile market swings, penalizing mortgage and small-business lending, and imposing a complex one-size-fits-all approach on measuring asset risks that forces capital standards to do what other supervisory tools can accomplish more effectively.