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ICBA to Agencies: Ensure Competitive Equity Under Basel II

Washington, D.C. (Nov. 5, 2003) - Concerned that Basel II will have an adverse impact on community banks and further accelerate the consolidation in the banking industry, the Independent Community Bankers of America has urged the federal banking agencies to delay further consideration of Basel II until the results of another quantitative impact study are collected and analyzed.

In a comment letter to the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency, ICBA noted that the last quantitative impact study-QIS3-generated more questions than answers and that no one is really sure of the competitive impact Basel II will have on the banking industry. "Both the agencies and the industry would benefit from another study to more accurately show the impact that Basel II will have on the capital of the largest banks and what competitive effect that impact will have on community banks," ICBA wrote.

The regulators have said that they plan to apply Basel II on a mandatory basis to only the large, internationally active U.S. banks and that other banks would be able to opt-in to the new accord provided they meet certain supervisory standards. ICBA commended the regulators for limiting the mandatory applicability of Basel II, noting that the advanced approaches of the new accord are inappropriate and infeasible for most community banks.

ICBA expressed concern, however, that community banks operating under Basel I may be at a competitive disadvantage because Basel II banks will have lower capital charges for residential mortgage, retail and small business loans, which are the bread and butter credits of community banks. "Since there is a cost to a bank for maintaining capital, the lower capital requirements may result in a cost advantage, and correspondingly a pricing advantage, in retail credits for large banks that are subject to Basel II," ICBA said in its comment letter.

ICBA also said that Basel I banks are concerned they may be considered "second tier" institutions by the market, the rating agencies, and sophisticated customers if Basel II is implemented and many banks opt-in. Second tier institutions may be interested in merging with the larger institutions to take advantage of Basel II, resulting in an acceleration of consolidation for the industry with negative consequences as competition and access to financial institutions is reduced.

If Basel II is implemented, ICBA recommended the agencies consider changes for Basel I to enhance its risk-sensitivity and to address any competitive equity concerns associated with a bifurcated regulatory capital framework. For example, if the capital requirements for mortgages under Basel II drops 50-60 percent as some have predicted, then changes such as additional risk categories or adjustments to risk weightings should be made to Basel I.