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ICBA Voices Strong Support for Federal Reserve Proposal on Enhanced Prudential Standards

Washington, D.C. (April 30, 2012)—As the nation’s voice for community banks, ICBA came out today in strong support of the Federal Reserve’s proposal regarding enhanced prudential standards for the largest and most complex financial institutions. In a letter to the Federal Reserve Board, ICBA wrote that the unprecedented intervention by the government to bail out the big banks cemented the market perception that many of these companies are too big to fail. The association also provided specific recommendations for improving restrictions on systemically risky financial firms to curb too-big-to-fail.

“The market perception of too-big-to-fail not only reduces the incentives of shareholders, creditors and counterparties of these financial institutions to discipline excessive risk-taking, it also provides these companies with a significant funding advantage over community banks,” said Camden R. Fine, ICBA president and CEO. “This distortion is unfair to community banks, damages competition, and encourages further consolidation and concentration in the financial system.”

In the letter, ICBA said it strongly supports enhanced capital and liquidity requirements and single-counterparty limits for bank holding companies with assets of $50 billion or more and nonbank financial firms that have been deemed systemically important financial institutions, or SIFIs. The association also expressed support for a capital surcharge on SIFIs that would not be less than what was proposed by the Basel Committee on Banking Supervision—a progressive common equity Tier 1 capital requirement of 1 percent to 2.5 percent based on the bank’s systemic importance.

ICBA also made specific recommendations for improving the standards:

  • SIFIs should maintain a tier 1 leverage ratio of at least 6 percent under both baseline and stressed conditions rather than the 4 percent the Federal Reserve proposed.

  • The liquidity and single-counterparty exposure limits proposed by the Federal Reserve should use gross limits on credit rather than simply relying on aggregate net exposures, which would allow the SIFIs to take advantage of exemptions and reduce their exposures.

  • The Federal Reserve’s proposed early remediation system should impose Level II restrictions when a SIFI’s leverage ratio drops below 6 percent. ICBA also suggested higher restrictions on dividends for Level II companies.

ICBA agreed with the Federal Reserve on the importance of stress testing the largest banking organizations and commended the regulatory agencies for not requiring stress testing for institutions with consolidated assets of $10 billion or less. “For the large banks, stress testing would have been helpful during the 2007-09 financial crisis in identifying institutions that were overexposed to derivatives and subprime mortgages,” ICBA said in the letter. “However, for most community banks, the regulatory burden and cost of annual stress tests would substantially outweigh the benefits.”

ICBA closed by saying that the association looks forward to the “second stage” of the Federal Reserve proposal later this year when the agency will recommend a SIFI capital surcharge and higher liquidity requirements consistent with the Basel III proposal.

For more information, visit www.icba.org.