ICBA Raises Concerns about Competitive Equity Under Basel II
In a comment letter to the banking agencies this week, ICBA raised concerns about Basel II's competitive effects on community banks and recommended that the agencies delay further consideration of Basel II until the results of another quantitative impact study are collected and analyzed.
ICBA noted that the last quantitative impact study-QIS3-generated more questions than answers and that 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.
The agencies 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 "community banks do not have the resources to use sophisticated internal risk rating models-which are overly complex and too costly for their needs-that meet the Basel II requirements." However, ICBA expressed concerns that under the new bifurcated framework, 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 noted that Basel I banks are concerned that 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 become more 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 drop 50-60% as some have predicted, changes such as additional risk categories or adjustments to risk weightings should be made to Basel I. ICBA also recommended that the agencies consider ways of simplifying Basel II to facilitate its implementation and supervision and that banks continue to be subject to the existing leverage ratio requirements.