America’s Community Bankers told the US Congress that a new study projecting significantly reduced capital requirements for big banks under the Basel II capital accord raises more concerns about the competitive impact on community banks.
Testifying at a joint hearing of two House subcommittees, William J. Small, a member of ACB’s board of directors, said: “As ACB testified on this issue almost a year ago, we believe that the development and implementation of the Basel II accord would present a significant competitive threat to community banks unless it is balanced by a carefully revised Basel I accord,” Small said.
Small is chairman, president and CEO, First Defiance Financial Corp., Defiance, Ohio, the $1.3 billion holding company for First Federal Bank of the Midwest. He appeared before the House Financial Institutions and Domestic and International Monetary Policy Subcommittees.
“ACB does not oppose the implementation of Basel II in the United States,” Small said, “but we believe that more examination is needed into the ability to implement the proposal adequately and the competitive impact of a bifurcated capital system.”
Small said the most recent quantitative impact study conducted by the banking regulators shows evidence of material reductions in the aggregate minimum required capital for participants in the study. “Capital requirements for mortgage loans could drop by more than 70 percent for some organizations,” he said. “There are steep drops for home equity loans and other consumer lending products as well.”
The latest study, Small said, confirms the results of a previous study showing that Basel II banks with primarily a retail portfolio may see their capital requirements reduced significantly.
“These institutions compete head-to-head with community banks in the retail area,” Small said. “Retail lending, particularly residential mortgage lending, is the fundamental business of community banks. Unless Basel I is revised, small institutions will become takeover targets for institutions that can deploy capital more efficiently under Basel II.”
Small said changes to Basel I could include more risk-weighted baskets and a breakdown of particular assets into multiple baskets that reflect differences in collateral types, loan-to-value ratios, and other factors. “Another alternative would be for the bank regulators to adopt a simplified risk-modeling approach that is consistent with the less complex operations of most community banks,” he said.
Small stressed the importance of the federal bank regulatory agencies agreeing to review and revise the Basel I capital accord concurrently with the new Basel II accord. “We would encourage the agencies to form an advisory group of bankers to participate in the process and to hold public roundtables on these very important issues,” he said. “ACB plans to be actively engaged in this process and will assist the regulators in any way we can.”
ACB supports legislation sponsored by House Financial Institutions Subcommittee Chairman Spencer Bachus (R-Ala.) and Rep. Carolyn Maloney (D-N.Y.), ranking Democrat on the House Domestic and International Money Policy Subcommittee, that would provide for a unified U.S. position on Basel II. The legislation would also require the agencies to evaluate and report to Congress on the cost and complexity of Basel II and the competitive impact on community banks.
Small said ACB strongly supports a provision of the bill giving the director of the Office of Thrift Supervision a formal seat at the Basel Committee on Banking Supervision. “It is essential for the OTS to have a formal role on these issues because of its status as the primary federal regulator for approximately 1,000 banking institutions with over $1 trillion in assets,” he said.