ICBA - News - News Release - ICBA: Basel II Capital Accord Should Be Delayed Until Impact Understood<br><i>More Study Needed, Viability of Community Banks at Risk</i>
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ICBA: Basel II Capital Accord Should Be Delayed Until Impact Understood
More Study Needed, Viability of Community Banks at Risk

Washington, D.C. (May 11, 2005) - The Independent Community Bankers of America (ICBA) told Congress today that the rulemaking under the Basel II Capital Accord should be delayed until further study determines the highly complex accord's full impact on the nation's financial system, including the competitive disadvantages it might create for community banks.

ICBA said it supports the decision of federal regulators to delay action under Basel II until results of the latest Quantitative Impact Study are fully understood and necessary adjustments are made. Preliminary findings indicated that the accord would trigger "material reductions" in minimum required capital, dropping capital requirements for residential mortgage and home equity loans more than 70 percent, for the largest banks adopting the new rules.

"Since there is a cost to a bank for maintaining capital, the lower capital requirements would most likely result in a cost advantage, and correspondingly a pricing advantage, in retail credits for large banks that are subject to Basel II," ICBA wrote. Warning that the current accord could drive further consolidation in the financial services industry, ICBA reiterated its support for legislation proposed by Rep. Spencer Bachus (R-Ala.) that would require a unified position among the regulators on Basel II.

In addition to supporting delay to allow for further study, ICBA offered several recommendations for action, including simplifying Basel II, maintaining adequate leverage ratio requirements, and enhancing the risk-sensitivity for Basel I requirements that community banks would continue to follow.

ICBA noted that the extreme complexity of the proposed Basel II requirements have caused regulatory errors in capital formulas that, though discovered and corrected, could have severely damaged the nation's financial system.

To assure that competitive equity between community banks and large banks, ICBA recommended that regulators better align the current capital requirements under Basel I with risk levels. However, ICBA cautioned that any adjustments should be not overly complicated to comply with. "Community banks are burdened enough with banking regulation and they do not want to comply with a very complex capital accord."

ICBA also strongly supported continuing a capital-to-assets leverage ratio requirement, and not reducing or eliminating the requirement as some policymakers have suggested. "It is very important to our economy that regulators maintain a minimum capital cushion for our largest financial institutions that pose the greatest risks to our financial system," the statement explained. "If a trillion dollar financial institution were to become significantly undercapitalized or fail the consequences to our economy would be enormous."

View the entire statement at www.icba.org/pressroom, and click on Testimony.