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ICBA Asks Banking Agencies to Retain Basel II Leverage Ratio and Safeguards, Modify Basel IA

Washington, D.C. (March 27, 2007)—The Independent Community Bankers of America (ICBA) commended the banking agencies' proposal to retain the tier I leverage ratio and the transitional safeguards as part of the implementation of Basel II capital rules and urged them to resist calls to lower capital requirements so that the large Basel II banks can compete with the international banks more effectively.

"We should never put our entire banking system in jeopardy because a few banks claim that they need lower capital requirements to compete internationally," said Camden Fine, ICBA president and CEO. "In the case of Basel II, where capital amounts are based on the bank's own inputs and risk parameters, it is even more important that the Basel II banks be subject to the tier I leverage ratio and prudent safeguards to ensure that there is not a precipitous reduction in capital."

Despite the Basel II transitional safeguards and efforts by the regulators to revise Basel I, ICBA told the agencies that it remains concerned that Basel II may place community banks at a competitive disadvantage. Basel II will yield significantly lower capital charges for residential mortgages and retail and small business loans, the very credits where community banks compete with large institutions. ICBA recommended that the agencies conduct another impact study during 2008 and fundamentally revise Basel II if the study shows that competitive disparities between Basel II and Basel IA still exist.

To reduce the costs and complexity of Basel II, enhance its flexibility, and mitigate competitive disparities between the Basel II banks and the rest of the industry, ICBA told the agencies that it supports allowing Basel II banks the option of using the standardized approach.

ICBA told the agencies that it strongly supports the creation of Basel IA capital rules in order to enhance the risk sensitivity of rules applicable to non-Basel II banks and help address competitive issues with a bifurcated capital system. ICBA commended the agencies for proposing to allow banks to opt-in to Basel IA, since many highly capitalized community banks prefer to remain under the current risk-based capital rules to avoid unnecessary regulatory burden. To improve Basel IA, ICBA recommended the following:

  • Three additional risk weights for mortgages (e.g., 10%, 35% and 75%) in addition to the current 50% and 100% risk weights based on loan-to-value ratios;
  • Lower risk-weights (e.g., 50% and 75%) for small business loans, commercial real estate loans and multi-family residential mortgages; and
  • Retention of the current 20% risk weight for GSE exposures and general obligation municipal securities.

Read ICBA's letter at www.icba.org.