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Myth: Basel III only applies to banks with assets over $500 million
Fact: Basel III applies to all banks regardless of size. The proposal even applies to $50 million community banks in rural areas. There is an exemption for consolidated bank holding companies under $500 million, but even their banks are fully subject to the provisions of Basel III. There is no exemption for savings and loan holding companies of any size.
Myth: Inclusion of accumulated other comprehensive income (AOCI) in capital will help my bank meet regulatory capital requirements
Fact: While many community banks have positive balances in their AOCI positions, those positions are subject to volatility due to changes in interest rates and credit spreads. The current positive balances are a product of continual ultra low interest rates, which cannot be sustained forever. Rapid increases in interest rates and credit spreads can reverse the gain position and force it to become negative in short order. These changes would have an immediate adverse impact on your regulatory capital.
Myth: My bank maintains very high levels of tier 1 capital today so I won’t need to worry
Fact: Even banks that exceed current minimum regulatory capital levels should be concerned. Adverse changes to residential mortgage risk weights, new requirements for common equity capital, inclusion of AOCI in regulatory capital, phase out of trust preferred securities, along with the adoption of new capital conservation buffers will deplete your current capital position and over time could cause your bank to fail to meet new regulatory minimums.
Myth: The Basel III proposal has a long phase-in period so I will have plenty of time to get my bank ready
Fact: Although the proposal allows for a phase-in period for certain provisions, there are many headwinds that will hamper the ability for community banks to meet and maintain new minimum regulatory capital requirements. Ultra low interest rates, a fragile economic recovery, threat of another recession, and constraints placed on residential lending all could contribute to your bank failing to meet regulatory minimums once the phase in periods have ended. And because community banks do not have access to the capital markets, the sole source of new capital must come from retained earnings, which will not be easily generated in another economic downturn.
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