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Proposed Basel II Capital Rules 'Overkill' for Community Banks, ICBA Says

JUNE 20, 2003


Proposed Basel II Capital Rules 'Overkill' For Community Banks, ICBA Says

The ICBA testified that it supports the decision of U.S. regulators to limit the scope of application of the Basel II capital accord in the United States and not to require it for "second tier" and community banks. "Basel II" refers to the proposed new, highly complex regulatory capital accord under development by the international Basel Committee on Banking Supervision that would replace the existing 1988 Accord (Basel I) with a more risk sensitive framework.

"The significant and far-reaching changes to the capital adequacy framework contemplated by Basel II are unduly complex and costly for U.S. community banks and would be unnecessarily burdensome," said Karen M. Thomas, ICBA director of regulatory affairs and senior regulatory counsel. "Stated simply, Basel II is overkill for non-complex community banks, and the costs and burdens of adhering to Basel II would outweigh the benefits, if any, of moving to the new accord." Thomas testified before the Subcommittee on Financial Institutions and Consumer Credit of the House Financial Services Committee.

Although pleased with the decision regarding the scope of application of Basel II in the U.S., the ICBA is concerned about the impact Basel II will have on community banks. "We are concerned that Basel II may place community banks at a competitive disadvantage," Thomas said. "Basel II will yield lower capital requirements for retail credits, including mortgages and other loans to individuals and small businesses-the very credits where community banks compete with large banks. This may result in a cost advantage, and correspondingly a pricing advantage, for large banks that are subject to Basel II."

To balance any competitive inequities, regulators may have to consider making appropriate adjustments for Basel I banks, such as additional risk buckets or changes in risk weights to increase risk sensitivity, Thomas recommended.

Full testimony