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Monday, October 15, 2012

Community Banks Being Threatened by Basel III

Bert Ely, a financial institutions and monetary policy consultant, and Alec Pollock, a resident fellow at the American Enterprise Institute, wrote a piece for the American Banker BankThink section today. The piece focused on the effect of Basel III on community banks.
[C]ommunity banks (defined here as financial institutions smaller than $1 billion in assets, which is less than one-tenth of 1% the size of megabank JPMorgan Chase) and the distinct feel they provide are currently being threatened by excessively complex Basel III capital requirements.
The letter discusses the recent actions of Andrew Haldane of the Bank of England and Thomas Hoenig of the FDIC.

Haldane recently remarked that “complexity generates uncertainty.” The complicated risk-based capital standards of Basel have already created great complexity and uncertainty in the banking industry. Haldane argues that simple rules would have performed better than the complex rules did.

Ely and Pollock note:
If this overly complicated approach is inappropriate for big, complicated banks, it is ridiculous for smaller, relatively simple ones. Not only will Basel III needlessly burden existing community banks, it will impede the healthy process of forming new ones.
Hoenig in recent remarks argued the Basel approach is “a system fundamentally flawed." Hoenig argues applying international standards to community banks is “illogical,” concluding that it would be better "to acknowledge our limits, to simplify the system" and "reject the Basel approach."

Ely and Pollock conclude:
If rejecting Basel III altogether in this fashion is not considered politically feasible, a sensible alternative would be to simply exempt all community banks from its requirements.

This should be easy for the regulators to adopt as a policy because the credit union industry already is not covered by the proposed Basel III regulation. In other words, the regulators already propose to exempt $1 trillion in banking assets from the bureaucracy of Basel III.
Read the full BankThink article by following the link in the ABARegPolicy twitter feed on the right of the Dodd-Frank Tracker homepage.

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