U.S. regulators say listening to small banks' Basel concerns

WASHINGTON Wed Nov 14, 2012 6:24pm EST

WASHINGTON Nov 14 (Reuters) - U.S. bank regulators sought to reassure lawmakers on Wednesday that they will incorporate community banks' concerns as regulators finish up new rules requiring financial firms to hold more capital.

Officials from the Federal Reserve, Federal Deposit Insurance Corp and Office of the Comptroller of the Currency told a U.S. Senate Banking Committee hearing that they are considering industry comments on rules proposed to implement an international capital agreement.

They said they could tweak the rules to make it easier for small banks to comply.

The Basel III capital agreement is considered one of the most critical reform efforts to make sure the global banking system is more resilient in the aftermath of the 2007-2009 financial crisis.

But some critics say U.S. regulators' plans to implement the rules would unfairly hurt community banks.

"The Federal Reserve believes capital requirements that improve the quantity and quality of regulatory capital would benefit the resiliency of all banking organizations regardless of size," said Michael Gibson, head of the Fed's banking regulation division.

"However, as we consider comments from industry participants and other interested parties regarding the proposed regulatory capital requirements, the Federal Reserve, along with the other banking agencies, will remain sensitive to concerns expressed by community banking organizations," he said.

Under the proposed rules, banks would have to hold about three times more basic capital to protect against potential losses. The biggest banks would hold even more.

The amount of reserve capital that banks must hold would be determined, in part, by the riskiness of their assets.

Banks have agreed that they need to hold more capital to guard against losses, but have criticized the particulars of the proposed rules.

Large banks say the rules go too far in forcing them to hold extra capital. Smaller banks have argued that extra compliance costs could hamper lending and stifle the U.S. economic recovery. Both have said the formulas to determine how much capital to hold for riskier assets are too complicated.

Some regulators have proposed exempting smaller banks from that formula-based portion of the rules, while others have suggested throwing out the rules entirely.

Sheila Bair, a former head of the FDIC who remains an outspoken reform advocate, said in a statement on Wednesday that regulators should implement Basel III for the biggest banks first.

U.S. Senator Michael Bennet, a Colorado Democrat, said during the hearing that small banks in his state are frustrated that they will face higher costs even though they were largely not responsible for the systemic problems during the financial crisis.

"They really worry that they're going to be driven out of business and that this is going to lead to consolidation," Bennet said. "If the market is driving consolidation, that's one thing. But if it's because of the regulatory burden that's solving a problem that doesn't actually exist in the community banks, that may not be the greatest answer."

Some lawmakers also said the models to figure out how much capital to hold for certain assets may be too complex and questioned whether some sovereign debt should be viewed as riskier than under the Basel rules as proposed.

After receiving more than 1,500 comment letters on the proposed rules, the three bank regulatory agencies said last week that banks would not have to comply with the new rules in January, as previously expected.

The officials at the hearing on Wednesday said they expect the requirements to change before a final rule is released.

"We have not reached decisions on any of these matters," said George French, deputy director for policy in the FDIC's risk-management division. "We anticipate making changes in response to comments."

The officials could not say when the final capital rules would be complete.