Banker sees threat in new capital rules of Basel III
Thursday, November 08, 2012
Posted by: Samantha Bowers
Wednesday, October 31, 2012
Banker sees threat in new capital rules of Basel III
By Debra Smith
HBJ Freelance Writer
EVERETT — Banking reform meant to fix the practices
that led to the 2008 financial meltdown could end up doing more harm
than good to the Snohomish County economy — and the nation.
capital rules proposed by the Federal Reserve will likely make it more
difficult for local businesses and individuals to obtain credit and
could even drive community banks out of business, say some financial
That would stifle smaller businesses, the lifeblood of the local economy.
new federal rules enact an international agreement known as Basel III.
International financial regulators conceived Basel III to create a more
resilient banking sector by strengthening global capital and liquidity
Regulators want to put a stop to mega banks’
laissez-faire lending practices that led to the global financial crisis
and U.S. recession in 2008. They want banks to rely more on equity than
debt to fund themselves.
The international accord and the federal
proposal would require banks to maintain capital equal to 7 percent of
their risk-bearing assets. That’s about three times what’s required now.
The rules would be phased in from 2013 to 2019.
In a comment
letter to the Federal Reserve, the Independent Community Bankers of
America asked regulators to exempt community banks from the proposed
Applying the capital standards to community
banks would shift the definition of regulatory capital, minimum capital
requirements and risk sensitivities, representatives from the national
organization wrote. The standards were "never intended to apply to a
domestic community bank.”
They added that the proposals would
significantly erode community bank profitability and credit availability
and drive community banks out of business.
Requiring banks to
have higher levels of minimum capital on hand is a positive change, said
Mark Duffy, CEO and president of Mountain Pacific Bank in Everett.
objects to the one-size-fits-all approach to calculating the risk of
loans. The rules are needlessly complicated for small banks, which
generally don’t offer complex investment and loan products such as
collateralized debt obligations.
On some loans, the rules assign
higher amounts of risk than before, which means a bank would have to
hold more capital. That, in turn, limits the amount of money the bank
can loan out.
For example, take a loan with a balloon feature.
Mountain Pacific Bank doesn’t handle many mortgages, but when they do,
they typically offer a fixed interest rate for the first five years,
then adjusts the loan to current market interest rates — hence the
balloon. This type of loan receives a much higher risk score under Basel
The new rules also change how capital assets are
calculated. Some assets that are now considered part of a bank’s capital
would not factor into the equation, which means small banks would be on
the hook to raise even more capital they couldn’t loan.
estimates that the new requirements will decrease Mountain Pacific’s
lending capacity by $11 million annually. That’s about 10 percent of the
bank’s current outstanding loans.
Troy McClelland, president of
Economic Alliance Snohomish County, warned in a letter to federal
regulators and legislators that Basel III would likely stifle the local
economy, "significantly limiting the capital available to small
businesses, local developers and even our local governments.”
analysis by EASC found that the rules could negatively affect more than
200 businesses and potentially harm 6,000 to 10,000 employees in
Snohomish County. In an interview, McClelland described those as
Officials from the state Department of
Financial Institutions’ Division of Banks have raised similar concerns
about Basel III and the fed’s proposed rules. So have more than 50 U.S.
senators in a letter to federal bank regulators.
So, too, has
the Conference of State Bank Supervisors, a national organization of
banking regulators. In a prepared statement, that organization called
the capital requirements "highly reactionary” and not in the best
interests of the U.S. banking system or the national economy.
supports strengthening capital requirements of community banks. In the
past four years he’s watched half of Snohomish County’s community banks
disappear, eaten alive by the economic crisis.
His own bank,
Mountain Pacific, got stuck with some troubled loans when the economy
fell apart, causing the Federal Deposit Insurance Corp. to place a
cease-and-desist order on lending. FDIC has since lifted that order,
after Mountain Pacific raised $10.5 million in additional capital,
increased liquidity and added to its loan-loss reserve.
solution, Duffy said, is to let the regulators who directly oversee
local banks calculate the lending risk formulas, not an international
The Conference of State Bank Supervisors
recommends strong capital standards for community banks, but insists the
framework must be clear and easy to implement and sustain.
overly complex capital rule will only increase cost to the industry,
curtail credit availability and drive industry consolidation,” according
to a prepared statement from the group of banking regulators.