Basel III. Regulators should reduce the CBLR to 8.5 percent to address the temporary but penalizing changes in community bank balance sheets caused by various pandemic stimulus programs. Regulators should also work toward a permanent 8 percent CBLR as a more practical alternative for community banks that execute a straightforward lending business model.
Recognition of ALLL Loss Absorption. FASB’s CECL accounting guidance clarifies that the allowance actually represents the first layer of the capital cushion to absorb bank losses. As such it should be included in tier 1 capital. Moreover, because the CECL accounting guidance requires the allocation of more capital to ALLL, it results in a larger omission from tier 1 regulatory capital calculations. ALLL should be included in tier 1 capital in an amount up to 1.25 percent of risk weighted assets, and the remaining balance of ALLL should qualify for inclusion in tier 2 capital.
Basel III Punishes Mortgage Servicing. The threshold deductions for mortgage servicing assets should be raised from 25 percent of common equity tier 1 capital to 50 percent of tier 1 capital. Additionally, for mortgage servicing assets that are not deducted, the risk weight should be restored to 100 percent from the overly punitive 250 percent.
High Quality Assets Must Be Recognized Under Liquidity Coverage Rules. ICBA believes that municipal debt as well as Fannie Mae and Freddie Mac mortgage-backed securities should be categorized as high-quality liquid assets, commensurate with their treatment in the capital markets, under liquidity coverage ratio rules.