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ICBA: Capital Conservation Buffer Threatens Ability of Many Community Banks to Raise Capital

Washington, D.C. (Feb. 20, 2014)—The Independent Community Bankers of America® (ICBA) today said that a provision in new Basel III capital rules will force community banks that are structured as Subchapter S corporations to operate at a disadvantage compared with other financial institutions. In a letter to the federal banking agencies, ICBA wrote that the new capital conservation buffer under Basel III capital rules would limit the ability of many community banks to raise capital and serve their communities.

“The community bank model is unique and represents a critical provider of banking services to many rural and underserved communities across the country,” ICBA President and CEO Camden R. Fine wrote in the letter to the federal banking agencies. “The continued progression of harmful bank regulation like the buffer is an immediate threat to the ability of many community banks to operate without undergoing a change in corporate structure, capital adequacy level, or business model.”

Whereas too-big-to-fail financial firms operate at reduced funding costs because of their implicit government guarantee and credit unions are not subject to taxation on income, community banks operate with the understanding that losses are privatized, income taxes must be paid and regulatory capital levels must be maintained at healthy levels. The more stringent capital requirements mandated by the new conservation buffer regulations would inflict disproportionate harm on many community banks, which do not benefit from these government subsidies.

The capital conservation buffer would be particularly detrimental to the approximately 2,000 community banks structured as Subchapter S corporations, which pass through income and losses to their shareholders. Because income taxes are paid directly by Subchapter S bank shareholders, situations could arise in which shareholders have a material income tax obligation on taxable income earned by their bank but the bank is unable to pay enough dividends to meet the shareholders’ tax obligation. This would clearly discourage community banks from being structured as Subchapter S corporations, hampering the ability of these institutions to raise capital and devaluing their franchises at a key point in the nation’s financial and economic recovery. As a result, the rule punishes the banks that are the most efficient users of regulatory capital and the consumers, small businesses and agricultural producers they serve.

Further, the Basel III regulatory capital rules were intended to apply to the largest and most complex internationally active banks—not community-based institutions. In its letter, ICBA asked regulators to allow Subchapter S community banks to distribute at least 35 percent of their reported net income for a reporting period, which would mitigate the negative impact of the rule on Subchapter S community banks, their shareholders and their communities.

About ICBA
The Independent Community Bankers of America®, the nation’s voice for nearly 7,000 community banks of all sizes and charter types, is dedicated exclusively to representing the interests of the community banking industry and its membership through effective advocacy, best-in-class education and high-quality products and services.

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