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ICBA Supports Revision of Basel I Capital Rules Urges Regulators to Examine ‘Competitive Disparities’

Revised Basel Rules Would Improve Community Bank Competitiveness

Washington, D.C. (January 19, 2006)—The Independent Community Bankers of America (ICBA) supports federal regulatory efforts for more risk-sensitive Basel 1A capital rules and urges regulators to conduct a study to determine if the rules mitigate competitive disparities between Basel I and Basel II banks.

"ICBA strongly recommends that the agencies conduct a quantitative impact study to determine the impact that a revised Basel I would have on minimum risk-based capital and whether the competitive disparities between the Basel I and Basel II accords would be mitigated by a revised Basel I," ICBA noted in its comment letter to federal regulators. ICBA has led efforts to promote community bank interests as revised capital rules are developed and continues to urge standards that ensure capital adequacy while minimizing paperwork burden on community banks.

ICBA's comment letter also stressed:

  • Highly capitalized community banks should have the option of continuing to use the existing Basel I capital rules to avoid the undue regulatory burden of more complex rules.

  • Additional risk weights (e.g., a 20% and 35% category) for assessing a bank's residential mortgage portfolio should be based on loan-to-value ratios. The LTV ratio should be determined at the time of loan origination and banks should have flexibility to update the risk weights as payments are made and LTV ratios change.

  • Further study is needed to determine the appropriate risk weight categories for acquisition, development and construction loans. Lumping them into one risk-weight category may not be appropriate.

  • A 75 percent risk weight category should be established for small business loans that are under $2 million, fully collateralized, amortizable over a period of 10 years or less and originated consistent with the banking organization's underwriting policies.

  • Past due loans should not have risk weights higher than 100 percent. Risk on past due loans is more appropriately managed and mitigated through loan loss reserves.

  • ICBA strongly supports regulators' decision to maintain the capital-to-assets leverage ratio requirement for all banks, including Basel II banks, to ensure adequate capital and a safe and sound banking system.

The entire text of the letter can be found at www.icba.org.