ACB: Press Releases

Contact:	Robert Schmermund (202) 857-3104 Jim Eberle (202) 857-3145	Jim Eberle (202) 857-3145 (work) (703) 893-2593 (home) [email protected]	For Immediate Release November 4, 2003 #03-54
E-mail: [email protected]

AMERICA’S COMMUNITY BANKERS URGES REGULATORS TO CONSIDER BASEL II’S COMPETITIVE EFFECTS ON COMMUNITY BANKS

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WASHINGTON, D.C. — America’s Community Bankers has urged the federal banking regulators to consider the proposed Basel II capital accord’s competitive effects on community banks.

“Many community banks will end up holding capital under the current capital requirement that is higher than that of more risky institutions” under the Basel II proposal, ACB said in comments to the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the Office of the Comptroller of the Currency.

ACB said it agreed with the accord’s approach of trying to more closely link minimum capital requirements with an institution’s risk profile, which could enable certain institutions to deploy capital more efficiently. But ACB said the proposal does not meet the goals of promoting stability, ensuring competitive equality and allowing for the effective monitoring of capital levels. In addition, ACB cited the proposal’s cost and complexity and the inability of institutions to understand, and supervisors to administer and enforce, the minimum capital requirements.

ACB urged the regulators to consider alternative approaches to implementing the new accord in its current form. ACB suggested revising the existing capital standards to make them more risk sensitive, and then adding provisions to capture any additional risk at the internationally active banks that would come under the proposed Basel II accord.

Another option would be to give more domestic financial institutions incentives to continue improving risk management practices by allowing U.S. banks and savings institutions to adopt the proposed accord’s simpler, “standardized” approach that will be used in some other countries. A third option would be to simplify the large bank internal-ratings based system to make it available for smaller banks.

“Even many of our smaller members would like the opportunity to improve their risk management practices to such a degree that they can use their own internal assessment of risk to determine adequate capital levels,” ACB said.

ACB expressed concern that disparate treatment might occur in the capital markets between public companies that are Basel II banks and public companies that remain subject to the existing capital requirements. Publicly traded community banks that operate under the same rigorous market demands as their global counterparts may well face negative market reaction. “These institutions may end up with higher costs for capital or may very well have to incur the significant costs of opting-in even though it may not be reasonable to do so,” ACB said.

Experts have estimated that it could cost more than $100 million for a large, internationally active bank to establish the infrastructure to comply with the Basel II accord, plus ongoing maintenance costs. “While the costs at smaller banks would be less, they would still be substantial and would eliminate the possibility for smaller institutions to opt in to the framework,” ACB said.

On other issues:

ACB urged the regulators to allow the capital charge for operational risk to be determined by supervisors rather than being included in the minimum capital requirements basket with credit and market risk.
The proposed minimum 10 percent assumed loss on defaults on residential loans is not realistic, ACB said, and should be lowered.
Capital requirements for acquisition, development and construction loans should be lowered and more closely aligned with risk.
ACB supported the Basel Committee on Banking Supervision’s recent proposal to change the treatment of expected losses, but said the treatment of differences between expected losses and loan reserves should be reconsidered.
U.S. banking institutions should continue to be subject to a leverage ratio requirement.
The disclosures should be further refined so that the information is understandable and useful to investors.

Click here for the comment letter.

America’s Community Bankers is the national trade association committed to shaping the future of banking by being the innovative industry leader strengthening the competitive position of community banks. To learn more about ACB, visit www.AmericasCommunityBankers.com.

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