• Final Rule - NEW!
• CBAI’s Position on Capital Rules (2012 Federal Policy Priorities)
• CBAI Statement on Basel III
• Notice of Proposed Rules (NPRs)
• Summary of Proposed Rules and Talking Points
• Regulators' Basel III Capital Estimation Tool
• Enhance the Regulators' Capital Estimation Tool
• CBAI Urges Extension of Comment Period
• Regulators Approve Extension of Comment Period
• Sign Petition
• Basel III Myths Dispelled
• A Growing Chorus of Concerns about Basel III
• Submit Comment Letter (instructions)
• CBAI Comment Letters
Federal banking regulators recently finalized the Basel III capital rules. An avalanche of comment letters prompted the regulators to miss their year-end 2012 deadline and reconsider their original proposal. CBAI is pleased that the strong voices of community banks have been heard. The Final Rule contains critically important concessions to community banks.
Accumulated Other Comprehensive Income (AOCI)
Regulators originally proposed including unrealized gains/losses on Available-for-Sale-Securities in capital. This proposal would have changed the investment behavior of community banks to the detriment of the housing recovery and municipal financing. Also, including unrealized gains/losses in capital would have injected significant volatility in community bank capital ratios.
The Final Rule permits a one-time permanent election (1st Quarter 2015 Call Report) for banks with less than $250 billion in assets to opt-out of including AOCI as part of regulatory capital.
Increased Risk Weights for Balloon Payment and Other Mortgage Loans
Regulators originally proposed significant increases in risk weights for residential mortgage loans, in some cases from 50% to potentially 150%. The proposal discounted the community bank business model of fair dealing and soundly underwriting residential mortgage loans. The proposal also ignored the importance of portfolio balloon mortgages particularly in rural communities and for nonconforming properties.
The Final Rule permits the use of current risk weights for residential mortgages when calculating risk-based capital.
Trust Preferred Securities (TruPS)
Regulators proposed phasing out of TruPS. Community banks earned an exemption for TruPS in the Collins Amendment to the Dodd Frank Act. The proposal was a clear violation of Congressional intent.
The Final Rule states that for bank holding companies that had total consolidated assets of less than $15 billion at December 31, 2009, TruPS are permanently grandfathered as a component of Additional Tier 1 Capital.
An additional victory is the delay in the implementation of the Basel III rules from January 1, 2014 to January 1, 2015.
CBAI sincerely thanks the many Illinois community bankers who submitted comment letters to the Federal Reserve’s Board of Governors, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. These victories would not have been possible without you. Here are several links to resources which you may be interested in reviewing.
New Capital Rule Community Bank Guide
Expanded Community Bank Guide to the New Capital Rule for FDIC-Supervised Banks
Federal Reserve Guide for Community Banks
OCC Quick Reference Guide for Community Banks
The regulators' stated purpose for proposing Basel III requirements is to improve the quality of regulatory capital and increase the level of capital requirements. The proposed changes to the Federal banking agencies’ capital rules would strengthen the quality and loss-absorbance safeguards provided by regulatory capital and enhance banks ability to continuing functioning as financial intermediaries, including during periods of financial stress. The proposed rules are divided into several separate proposals: Market Risk Final Rule, Advanced Approach Notice of Proposed Rulemaking (NPR), General Basel III NPR, and Standardized Approach NPR.
The Market Risk Rule and the Advanced Approach NPR are applicable to large internationally active institutions and generally not applicable to community banks. The latter two NPR’s (General Basel III and Standardized Approach NPR) are generally applicable to community banks. The General Basel III NPR would strengthen the definition of capital, and the Standardized Approach NPR proposes a number of enhancements to the calculation of risk-weighted assets.
The proposed NPRs were approved by the Boards of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of Comptroller of the Currency (OCC). The initial expiration date for comments was September 7, 2012. As a result of pressure from community bankers, CBAI and the ICBA, the regulators approved a 45-day extension for public comments, with a new deadline of October 22, 2012.
The NPRs effectively adopt international capital standards set by the Basel Committee on Banking Supervision. These Rules are designed to prevent a repeat of the financial crisis. Community banks, however, were not the cause of the financial crisis. Community bankers are concerned by the regulators’ plan to increase capital levels and to revamp the way banks must measure risk on certain assets by increasing risk weights. When combined, the two NPRs would increase capital requirements, compliance costs, and curb lending.
CBAI and ICBA have argued that such increased capital requirement are inappropriate for community banks, would be a significant challenge to implement, and would jeopardize the very existence of many community banks.
CBAI’s 2012 Federal Policy Priorities include our general thoughts on capital rules for community banks.
- Support Equitable Capital Rules for Community Banks
- CBAI supports capital rules which do not disadvantage community banks relative to other financial institutions, which are not overly complex and represent a regulatory compliance burden, and which provide community banks with options with respect to which capital framework they chose to be a part of.
- CBAI strongly supports higher capital buffers and liquidity requirements for systemically risky financial institutions and will be monitoring the recommendations of the Financial Stability Oversight Council and the Basel Committee on Banking Supervision.
- CBAI opposes the inclusion of accumulated and other comprehensive income (i.e., unrealized gains and losses on securities held available-for-sale) in the calculation of Tier 1 regulatory capital due to the introduction of interest rate volatility on capital adequacy.
Unfortunately, the proposed NPRs disadvantage community banks. The proposed rules are overly complex and treat all banks in a uniform manner. They also include an accumulated other comprehensive income in the calculation of Tier 1 regulatory capital and increase risk weights for community bank assets.
CBAI vigorously opposes the proposed Basel III and the Standardized Approach NPRs.
CBAI advocates that community banks be exempt from the Basel III and Standardized Approaches NPRs.
Basel III was designed to prevent another financial crisis. The community banking industry (unfortunately) represents a minority of the nation’s banking assets. Individual community banks pose absolutely no systemic risk; therefore, these requirements should not be applicable to community banks.
Here are the links to the two NPRs that are generally applicable to community banks.
- Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition Provisions
- Regulatory Capital Rules: Standardized Approach for Risk-weighted Assets; Market Discipline and Disclosure Requirements
Here are the links to ICBA summaries of the Basel III NPR’s.
The federal banking regulatory agencies have developed a capital estimation tool to help community banks evaluate the impact of the proposed Rulemaking regarding Basel III (capital standards) and Standardized Approach (asset risk weights).
Read Joint Release dated September 24, 2012
Michael Stevens, Executive Vice President of the Conference of State Bank Supervisors (CSBS), joins CBAI in voicing his concerns and the call for community banks to contact their regulators about the impact of Basel III when he said recently, “The industry needs to communicate to the agencies how the proposed rules will impact the way they manage their balance sheets and extend credit. We need a strong banking system with sufficient capital, but one that can also fuel economic development and job growth.” (CSBS Examiner 9/28/2012)
The CSBS has provided banks with suggestions for enhancing the regulators’ Basel III calculator.
- Want More out of the Basel Calculator?
- The Regulatory Capital Estimation Tool provides a valuable look into the proposed rule. However, the result is static based only on the bank’s June 30 call report numbers. The CSBS Examiner offers the following suggestions to enhance the understanding of the proposed changes under a variety of potential scenarios:
- 1. Alter the bank’s loan mix. Given the current state of the economy, the portfolio may be more conservative than typical. What if the bank became more aggressive with mortgage lending? What if construction lending were to increase?
- 2. Change the value of unrealized gains or losses on available for sale securities. (Basel III Approach Values, cell C7). With the rate environment, many banks have appreciation in their bond portfolios. Under the proposed rules, this has the effect of adding capital. What will happen when rates rise and this appreciation evaporates or even becomes a loss?
- 3. Grow the bank. A growing economy will offer growth opportunities for a bank. How do proposed changes in risk weights and growth impact a bank’s ability to remain well capitalized?
CBAI urged the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Comptroller of the Currency to approve a 90-day extension to the proposed comment expiration of September 7, 2012. Community banks do not have the requisite compliance capacities, unlike the too-big-to-fail mega banks, and need this additional time to study the proposals and determine the impact on their balance sheets of the proposed NPRs. Read Letter.
On August 8, 2012, the regulators agreed to extend the comment period from September 7, 2012 to October 22, 2012.
The Independent Community Bankers of America (ICBA) is circulating a petition urging the banking regulators to exempt community banks from the proposed implementation of Basel III in the United States and to allow community banks to continue operating under Basel I capital regulations.
Please Click Here and encourage your directors, employees, customers and family members to sign the petition.
Myth: Basel III only applies to banks with assets over $500 million
Fact: Basel III applies to all banks regardless of size. The proposal even applies to $50 million community banks in rural areas. There is an exemption for consolidated bank holding companies under $500 million, but even their banks are fully subject to the provisions of Basel III. There is no exemption for savings and loan holding companies of any size.
Myth: Inclusion of accumulated other comprehensive income (AOCI) in capital will help my bank meet regulatory capital requirements
Fact: While many community banks have positive balances in their AOCI positions, those positions are subject to volatility due to changes in interest rates and credit spreads. The current positive balances are a product of continual ultra low interest rates, which cannot be sustained forever. Rapid increases in interest rates and credit spreads can reverse the gain position and force it to become negative in short order. These changes would have an immediate adverse impact on your regulatory capital.
Myth: My bank maintains very high levels of tier 1 capital today so I won’t need to worry
Fact: Even banks that exceed current minimum regulatory capital levels should be concerned. Adverse changes to residential mortgage risk weights, new requirements for common equity capital, inclusion of AOCI in regulatory capital, phase out of trust preferred securities, along with the adoption of new capital conservation buffers will deplete your current capital position and over time could cause your bank to fail to meet new regulatory minimums.
Myth: The Basel III proposal has a long phase-in period so I will have plenty of time to get my bank ready
Fact: Although the proposal allows for a phase-in period for certain provisions, there are many headwinds that will hamper the ability for community banks to meet and maintain new minimum regulatory capital requirements. Ultra low interest rates, a fragile economic recovery, threat of another recession, and constraints placed on residential lending all could contribute to your bank failing to meet regulatory minimums once the phase in periods have ended. And because community banks do not have access to the capital markets, the limited sources of new capital include now and existing shareholders and retained earnings, which will not be easily generated in another economic downturn.
CBAI is not alone in voicing significant concerns about the harmful impact of Basel III on community banks.
Cam Fine, President and CEO of the Independent Community Bankers of America (ICBA), stated, “Applying these stringent and overly complex rules on community banks is illogical because they did not contribute to the financial crisis. ICBA strongly supports a tiered approach that properly recognizes the differences between Main Street community banks and Wall Street megabanks.” (ICBA News Release 9/14/2012)
Thomas Hoenig, Director of the Federal Deposit Insurance Corporation, said of calculating the Basel III risk-weighted capital ratios, “it does so by using highly arcane formulas, suggesting more insight and accuracy than can possibly be achieved.” Hoenig went on to recommend that, “starting over offers the best possible opportunity to produce a better outcome.” (Back to Basics – A Better Alternative to Basel III Capital Rules, September 14, 2012)
The latest update to the International Monetary Fund’s Global Financial Stability Report finds that large banks with advantages of scale may be better able to absorb the costs of the [Basel III] regulations which would apply to all U.S. banks unless changed by policymakers. The IMF also wrote that new banking standards might encourage certain financial activities to move to the non-banking sector. (IMF October 2012)
In a letter to regulators regarding Basel III, a majority of the United States Senate cautioned, “We understand capital is an important source of strength in our financial system. However, the complexity of new global rules adds little value to the community institutions which your agencies rigorously regulate and monitor. As you review these proposed rules, we respectfully request you consider these unintended consequences and their effect on the viability of community banks across the country.” (American Banker September 27, 2012)
Finally, Greg Gonzales, Chairman of the Conference of State Bank Supervisors (CSBS), clearly and strongly stated their position on the proposed Basel III capital standards and risk-weights when he said, “An overly complex capital structure will only increase the cost to the industry, curtails credit availability, and drive industry consolidation. This is not in the economic best interests of the United States and it will be especially damaging to the economic prospects of local communities … across the country.” (Media Release of October 3, 2012)
CBAI urges all community bankers to become familiar with the proposed rules covering new capital requirements and asset risk weights. If implemented as proposed, these rules may endanger the existence of your community bank.
Your opportunity to inform the regulators about their impact on your bank and to help shape the rules will expire on October 22nd. Your voice must be heard! Now is the time to speak-up. Find CBAI’s comment letters and much more at CBAI’s Basel III Resource Center.
CBAI encourages all bankers to comment on the impact of the Basel III NPRs on their community banks and recommends that your personalized comment letter be organized as follows.
- 1. Introduction
- An introductory sentence should include your name, title, the name of your bank, and a statement that the Fed/FDIC or OCC is your primary regulator.
- Next should be a brief description of your bank's location, asset size, and business model or area of concentration (i.e., agriculture, small business lending, residential mortgage lending).
- You should express your general concern for the impact of the proposed NPRs on your bank’s capital position and thus your ability to serve your customers and communities.
- The paragraph should conclude with your request for your and all community banks to be exempted from the Basel III capital requirements and the standardized approach for risk weighted assets.
- The body paragraph should detail the areas of Basel III that most concern you and would negatively impact your bank’s ability to serve your customers and communities. The regulators are looking for specific data versus general statements of dissatisfaction. The most effective comment letters will clearly demonstrate the negative impact of these NPRs on your community bank.
- The final paragraph should thank the regulators for the opportunity to comment, restate your request for your and a community bank exemption, and provide your contact phone number and e-mail address for questions or additional information.
Please do not personally sign the letter, or reveal any confidential data, as letters will be posted by the regulators as submitted for anyone to view. Use the e-signature convention /s/ instead of your actual signature.
Comments may be submitted within the body of your e-mail or as an attached letter. CBAI’s comment letter will be sent as a PDF attachment to an e-mail.
Please make sure to include the Docket or RIN Numbers in the subject line of your e-mail and/or the “Regarding:” line in your faxed letter so the regulators can properly direct the comments to the appropriate area.
Here are the detailed instructions for each of the three primary regulators:
|E-mail: firstname.lastname@example.org||E-mail: email@example.com||E-mail: firstname.lastname@example.org|
|Mail: Office of the Comptroller of the Currency
250 E Street, SW
Mail Stop 2-3
Washington, DC 20219
|Mail: Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
Mail: Robert E. Feldman, Executive Secretary
Attention: Comments/Legal ESS, FDIC
550 17th Street, NW
Washington, DC 20429
|Fax: 202-874-5274||Fax: 202-452-3819 or 202-452-3102|
Instructions: include OCC as agency name, use Docket ID OCC-2012-0008 for discussions on minimum capital, use Docket ID OCC-2012-0009 for discussion on risk weights
|Instructions: include Docket No. R-1430; RIN No. 7100-AD87 for discussions on minimum capital, use Docket No. R-1442; RIN No. 7100-AD87 for discussion on risk weights||
Instructions: include FDIC as agency name, use RIN 3064-AD95 for discussions on minimum capital, use RIN 3064-AD96 for discussion on risk weights
For example, if you are commenting on both NPRs applicable to community banks, the Subject Line in your e-mail (or the “Regarding:” line in your faxed letter) to the appropriate regulator(s) would read as follows –
OCC - Basel III Docket ID OCC-2012-0008, Docket ID OCC-2012-0009
Federal Reserve - Basel III Docket No R-1430; RIN No 7100-AD87, Docket No R-1442; RIN No 7100-AD87
FDIC - Basel III RIN 3064-AD95, RIN 3064-AD96
CBAI has and will be drafting several comment letters regarding Basel III.
The first comment letter encouraged the regulators to extend the comment period. Read Letter. CBAI is pleased that the regulators approved an extension of the comment period.
The second comment letter was more general in nature and called for a community bank exemption to Basel III. Read Letter.
The final comment letter (14 pages in length) renewed the call for a community bank exemption to Basel III and highlighted twelve (12) specific proposals which were most harmful to community banks. Read letter.
as of July 16, 2013