The entire U.S. banking industry breathed a collective sigh of relief recently when the three federal bank regulatory agencies postponed indefinitely the effective date of the Basel III capital and liquidity rules, which had been set for Jan. 1, 2013. The proposed rules, which would have applied more or less equally to all institutions—from the country’s largest bank, JPMorgan Chase & Co., to very small community banks in out-of-the-way rural locations—set off a firestorm of protest throughout industry.
Following their release in June, the proposed rules reportedly generated more than 2,000 comment letters from bankers as both the American Bankers Association and Independent Community Bankers of America orchestrated letter writing campaigns. Members of the U.S. Congress, including 53 senators from both parties, also expressed their concern during the comment period. And one prominent federal regulator—former Kansas City Federal Reserve Bank President Tom Hoenig, now a board member of the Federal Deposit Insurance Corp.—even urged that the entire proposal be scrapped and replaced with a simpler plan.
Community banks in particular were not objecting to higher capital levels per se since many of them—a great percentage of which are privately owned—have traditionally carried higher levels of capital on their balance sheets than large publicly owned banks, which tend to be more highly leveraged. But they did object strongly to certain Basel III provisions, such as a fairly stringent risk-weighting system that would have required them to put higher levels of capital against certain kinds of assets, including mortgage loans, commercial loans and even U.S. government securities. Basel III also would eliminate a highly popular form of Tier I capital at many small banks—trust preferred securities—from consideration, forcing them to raise new capital at a time when many investors, both public and private, are wary of banks generally.
Some community bankers stated flatly that the new rules would force them to sell out if they couldn’t raise fresh capital. Others worried that the risk-capital weighting for mortgage loans would effectively shut them out of that business, negatively impacting their profitability and possibly the home buying market itself.
When announcing the postponement, federal regulators did not indicate how the Basel III rules might be modified or when they would take effect. The least likely outcome is that the feds will actually lower the overall capital requirements for banks, including very small ones, because there seemed to be widespread consensus in Washington coming out of the 2008 financial crisis that the banking industry needed to have a stronger balance sheet. A more likely outcome might be that the regulators create a simpler and less onerous risk weighting system for small banks, and then give them ample time to come into compliance with whatever approach they adopt.
One thing is for sure: Bankers often fuss and fume—with more than a little justification—that the regulators in Washington never listen to their complaints about the regulatory burden, but this time the feds heard them loud and clear.