Basel III, Leverage Ratio Capitalize on Tiered Regulation

It’s been a long time coming, with a few delays and several thousand comment letters, but regulators have finalized their key Basel III capital rules. For community bankers, there’s some bad news and some good news.

The bad news is that we didn’t get the full exemption we have been advocating since the Basel III proposal came out more than a year ago. As we’ve told anyone who will listen, and even those who won’t, Basel III was conceived to apply to the large and risky financial firms that caused the financial crisis, not highly capitalized community banks. So we’re disappointed that regulators did not grant a full exemption to financial institutions with $50 billion or less in consolidated assets.

But make no mistake—there is good news as well.

First of all, regulators listened to the concerns of ICBA and community bankers across the nation—and the more than 17,000 signatures on our Basel III petition—and made some much-needed changes to the original proposal. Allowing community banks to opt out of including accumulated other comprehensive income as part of regulatory capital, retaining Basel I risk weights for residential mortgages, and allowing grandfathered trust-preferred securities as Tier 1 capital are crucial for preserving community bank viability and lending. Further, community banks don’t have to begin complying with the rules until Jan. 1, 2015.

But perhaps the most positive sign was that the regulators advanced a proposed rule to increase the supplementary leverage requirements for the largest banking institutions. The new rule would apply a 6 percent supplementary leverage ratio to the eight largest banking organizations and a 5 percent standard on their bank holding companies.

ICBA firmly supports this proposal, which would help rein in our too-big-to-fail problem by targeting the risky financial instruments that the largest institutions keep off their balance sheets. Further, this plan bolsters ICBA’s decades-long fight for a tiered regulatory approach that distinguishes between common-sense community banks and the nation’s largest and riskiest institutions. Like the bipartisan Terminating Bailouts for Taxpayer Fairness (TBTF) Act of 2013 (S. 798), this measure uses higher leverage ratios to target risk without hamstringing low-risk institutions on Main Street.

Here’s some more good news: I have no doubt that ICBA and community bank advocates nationwide have played a key role in this push. We have fought this battle time and again, and it is paying off. But we certainly aren’t going to stop now. ICBA and the nation’s community bankers will continue to support tiered regulations that target the true source of financial risk and allow highly capitalized institutions to support smart and sustainable economic growth. And that should be news to no one.