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ICBA Comments on Basel Capital Proposal

JULY 20, 2001


And Meets with Basel Committee

The ICBA has urged the international Basel Committee on Banking Supervision and U.S. regulators to recognize that the proposed new Basel Capital Accord is overly complex for the vast majority of U.S. community banks. In a comment letter, the ICBA stressed that the New Accord would unduly increase regulatory burden and costs for community banks without commensurate benefit. "We recommend instead that noncomplex banks be given the option to continue to have their capital adequacy assessed using the current risk-based capital rules, which we believe remain well-suited for that purpose," ICBA wrote.

The proposed New Accord would make significant and far reaching changes to risk-based capital requirements, including allowing banks to use either sophisticated internal credit risk rating models and systems to measure capital adequacy (the Internal Ratings Based or IRB Approach), or a Standardized Approach that would substantially refine current risk-based capital rules by incorporating external credit ratings and credit risk mitigation elements in the risk-weight framework. Both the IRB Approach and the Standardized Approach make changes that are inapplicable and/or inappropriate for most community banks.

The ICBA also expressed concern that the New Accord could result in higher minimum capital thresholds for community banks, putting them at a competitive disadvantage if large, complex banks use the New Accord to keep their capital levels very tight. ICBA urged the Basel Committee to keep these concerns in mind as it considers the appropriate treatment of retail and small business credits in the New Accord.

The ICBA had the opportunity to express these views directly to the Basel Committee this month at a meeting the Committee held for representatives of small and medium-sized banks around the world. Joanne Shephard, president and CEO of First National Bank of Valentine, NE, and chairman of ICBA's Regulation Review Committee, and Karen Thomas, ICBA's director of regulatory affairs, represented U.S. banks at the meeting.

Comptroller of the Currency Jerry Hawke, one of four U.S. regulators that sit on the Committee, said that U.S. regulators do not intend to apply the New Accord to noncomplex banks. Basel Committee chairman and NY Fed president William McDonough echoed this comment, stressing that the Committee recognizes that each country's supervisors must have flexibility to determine the scope of application of the Accord in their own country. McDonough also reassured the meeting attendees that the Committee recognizes the important role small and medium-sized institutions play in the economy by providing credit to small and medium-sized businesses. In that regard, the Committee will carefully consider the competitive impact on small banks and their customers as they continue to work on the New Accord.

The Basel Committee originally planned to finalize the New Accord by the end of 2001, with implementation by 2004. Based on comments from the industry, the Committee has decided, however, that significant work remains to be done on the New Accord. The Committee announced last month that it will release a revised proposal for another round of comments early in 2002, pushing implementation back to 2005.