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ICBA Testifies: Exempt Community Banks from Basel III

Exemption Key to Preventing Industry Consolidation and Fewer Credit Options for Consumers

Washington, D.C. (Nov. 29, 2012) — The Independent Community Bankers of America (ICBA) today detailed in congressional testimony why policymakers should exempt the nation’s community banks from proposed Basel III regulatory capital standards. Testifying before the House Financial Services Subcommittees on Insurance, Housing and Community Opportunity and on Financial Institutions and Consumer Credit, ICBA Chairman-Elect William A. Loving Jr. said that the guidelines should not apply to U.S. financial institutions with consolidated assets of $50 billion or less.

“Basel III was meant to apply only to the very largest, internationally active institutions,” said Loving, who is also president and CEO of Pendleton Community Bank in Franklin, W.Va. “Community banks, with their simple capital structures and transparent and conservative lending, have little in common with these larger institutions. Applying the same capital rules, in addition to the many other new and far-reaching regulations that are soon becoming effective, will only undermine the viability of thousands of community banks.”

Loving said that applying Basel III and the standardized approach to community banks would lead to further industry consolidation. By penalizing relationship-based lending without regard to asset quality, the rules would leave consumers with fewer options and less access to credit. Further, he said, imposing complex and excessive capital standards is not viable for community banks because they have extremely limited options for raising new capital, unlike their larger competitors. Mutual banks and other thrifts will be disproportionately affected, Loving noted, because they hold more mortgages loans than other community banks.
Loving cited an ICBA Basel III petition signed by nearly 15,000 individuals.  The petition notes that community banks maintain the highest capital levels in the banking industry and did not engage in the reckless behavior that contributed to the recent financial crisis. Basel III will only limit the ability of community banks to lend and invest in their communities and threaten the nation’s economic recovery, the petition states.

If policymakers do not exempt community banks from the Basel III guidelines, Loving said, they should greatly simplify the rule and better align the proposed capital standards to the unique strengths and activities of community banks. Among its modifications, ICBA is calling for regulators to:

  • fully exempt banks under $50 billion in assets from the standardized approach for risk-weighted assets,
  • reduce the  proposed substantially higher risk weights for balloon mortgages and second mortgages to their current Basel I levels,
  • exclude changes in unrealized gains and losses in investment portfolios (accumulated other comprehensive income) from the calculation of regulatory capital for banks under $50 billion in assets to avoid harmful and unnecessary volatility in capital adequacy,
  • continue the current Tier 1 regulatory capital treatment of trust-preferred securities issued by bank holding companies with consolidated assets between $500 million and $15 billion to reflect congressional intent,
  • exempt all thrift holding companies with assets of $500 million or less from Basel III and the standardized approach (just as bank holding companies are) or provide a policy rationale for why they are not exempt, and
  • apply Basel III and the standardized approach to credit unions if the rules will apply to community banks.

To read Loving’s testimony and for more information, visit www.icba.org/advocacy.