ICBA Policy Resolutions for 2013
ICBA Priorities for 2013

REGULATORY CAPITAL; BASEL III AND THE STANDARDIZED APPROACH

• ICBA supports strong capital requirements for all banks.
  
  
• Basel III and the standardized approach should not be applied to financial institutions with consolidated assets of $50 billion or less. Applying theses new rules to community banks will drive broad industry consolidation and harm communities served by community banks.
  
  
• Risk weights should not penalize well underwritten customized loans, including balloon mortgages, or second mortgages. These loans are a staple of community bank lending.
  
  
• Accumulated other comprehensive income (AOCI) should continue to be excluded from the calculation of regulatory capital for banks under $50 billion in assets. If it is not excluded, then changes in the fair value of certain securities should be exempt.
  
  
• Consistent with the Collins Amendment of the Dodd-Frank Act, bank regulators should continue the current Tier 1 regulatory capital treatment of TruPS issued by bank holding companies with consolidated assets between $500 million and $15 billion.
  
  
• Bank holding companies and thrift holding companies should be treated consistently with respect to capital standards.
  
  
• Capital standards should recognize the loss absorbing capacity of the allowance for loan and lease losses (ALLL). Specifically, ALLL should be included in Tier 1 capital in an amount up to 1.25% of risk weighted assets and the remaining balance of ALLL should qualify for inclusion in Tier 2 capital.
  
  
• Capital standards should not discourage community banks from acquiring mortgage servicing assets. ICBA opposes any change to the deduction thresholds applied to mortgage servicing assets.
  
  
• Bank regulators should take care not to negatively impact the nation’s minority banks in developing capital standards.
  
  
• Community banks should be exempt from the provisions of the capital conservation buffer.
  
  
• Capital standards should not disadvantage community banks relative to credit unions.

Background

ICBA supports strong minimum capital levels for all banks, including community banks. Nevertheless, any regulatory response to the financial crisis of 2008, including any changes to the capital standards, should begin with the recognition that community banks were not the cause of that crisis. Their simplified balance sheets, conservative lending practices, and common sense underwriting shielded their regulatory capital balances from the losses that heavily impacted the large, complex, internationally-active and interconnected worldwide financial institutions.

Basel III was conceived as a standard that would apply only to the largest, internationally active banks so that, for instance, a large European bank would be subject to the same capital standards as its large banking competitor in the United States. It was never intended to apply to a domestic community bank.

The application of Basel III and the standardized approach to community bank regulatory capital represent a very large shift in the definition of regulatory capital, minimum capital requirements, and risk sensitivities of certain financial institution assets that will heavily impact all community banks in the United States in an overwhelmingly negative manner and will inflict irreversible damage on these institutions and the communities they serve. In short, the proposals will significantly erode community bank profitability and credit availability, and drive industry consolidation. Many community banks will be unable to survive these rules as they are currently proposed and will be forced to merge or consolidate with other institutions.

Many of the provisions of Basel III and the standardized approach are advanced without due consideration of their impact on community banks and their ability to continue to serve the needs of their customers in the thousands of communities they serve across the nation. The introduction of the capital conservation buffer, new definitions for common equity tier 1 regulatory capital, new punitive risk weights for certain assets including residential mortgages, and the timeline proposed for adoption of the new minimum capital levels, present many expensive, complex, and unnecessary regulatory burdens for community banks that contribute little or nothing toward improving the strength and stability of the nation’s community banks. For instance, if Basel III were implemented as proposed, community banks and would have to hold capital well in excess of the capital conservation buffer to avoid the onerous dividend restrictions that would be imposed if their risk-based capital ratios fall below the buffer. Dividend restrictions would be a problem for Subchapter S banks in particular because shareholders rely on dividends to offset the bank’s tax liability which is passed through to them.

ICBA urges regulators to exempt financial institutions in the United States with consolidated assets of $50 billion or less from Basel III and the standardized approach. Absent a full exemption, which is the most prudent approach, ICBA urges the regulators to make widespread modifications to both proposals and wholesale exemptions, where necessary, when applying them to community banks to better reflect the inherent risks in the community banking business model without jeopardizing the current strong capital position that community banks have continually maintained for many years even through the recent financial crisis. These modifications are specified in the position statement of ICBA 2013 Regulatory Capital Policy Resolution, and in greater detail, our October 22, 2012 comment letter on Basel III and the Standardized Approach.

Staff contact: James Kendrick

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