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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 June 22, 2004 #04-33
E-mail: [email protected]

ACB CALLS FOR CHANGES TO BASEL I CAPITAL REQUIREMENTS TO BE MADE CONCURRENT WITH BASEL II IMPLEMENTATION

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WASHINGTON, D.C. — America’s Community Bankers told Congress today that the current Basel I capital requirements for community banks must be changed at the same time as the Basel II capital accord is implemented for the largest banks.

Testifying before the House Financial Institutions Subcommittee, Kathleen E. Marinangel, a community banker and board member of ACB, said: “I believe that the development and implementation of the Basel II accord will present one of the most significant threats to community banks today unless it is balanced by a carefully revised Basel I accord.

“While nobody can say with certainty what the impact of a bifurcated system will be, one can assume that it will open the door to competitive inequities,” said Marinangel, who is chairman, president and CEO, McHenry Savings Bank, McHenry, Ill.

She gave this hypothetical example: “Two banks, a larger Basel II bank and a small Basel I community bank, could review the same mortgage loan application that presents the same level of credit risk. However, the larger bank would have to hold significantly less capital than the small bank if it makes that loan, even though the loan would be no more or less risky than if the community bank made the loan.” The community bank “may not be able to offer that borrower the same competitive interest rate,” she said. “This cannot be the right result.”

Marinangel also expressed concern that smaller institutions will become takeover targets for the larger institutions that can deploy capital more efficiently under Basel II.

Marinangel said that ACB does not oppose implementation of Basel II, but has concerns about the manner in which it will be done. “Unfortunately, the complexity and cost of implementing the Basel II accord will preclude the vast majority of banks from taking advantage of the plan’s positive benefits,” she said. Only the 10 largest, internationally active banks will be required to adopt the Basel II standard and another 10 to 15 will have the resources to voluntarily comply.

“I think the resultant disparity that will be created between these mega-banks and community banks is totally wrong,” she said. “My perspective is that of a CEO of a small community bank that does not currently have the resources to voluntarily comply. Under the current proposal, my institution would remain subject to Basel I. If it were economically feasible, my bank would opt-in to Basel II,” a view shared by ACB.

One approach to addressing competitive concerns would be to revise the current accord to make it more risk-sensitive for all institutions, and then add more complexity to capture any additional risk at more complex and sophisticated institutions, Marinangel said.

“A revised Basel I would include more baskets and a breakdown of particular assets into multiple baskets to take into consideration collateral values, loan-to-value ratios and credit scores,” she said. “Credit mitigation measures, such as mortgage insurance and guarantees, could be incorporated into the framework and other revisions could be made to further refine current capital requirements.”

Another option would be to give banks more incentives to improve risk management practices by allowing Basel I banks to adopt the standardized approach in the Basel II accord that will be available in other countries. “The conditions for opting into the more advanced internal ratings-based approach could be made less burdensome and the approach could be simplified to make it a more viable prospect for smaller institutions,” Marinangel said.

She also recommended that regulators allow smaller institutions to use third-party vendors, consortiums or other joint approaches in meeting the conditions for opting in to the new accord.

Click here to read the Testimony

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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