Basel III Capital Rules: Delay is a victory for community banks

The new proposed capital and liquidity requirements from Basel III pose a major threat to the survival and profitability of community banks, according to Edgar Ortiz, President and CEO of Strategic Analytic Solutions LLC. In part 1 of this guest column, Ortiz provides insight into how the delay of the Basel III rules was a victory for community banks across the country.

The threat of the one-size-fits-all prescription

By Edgar Ortiz

Community banks across the nation are breathing a sigh of relief at the news that U.S. bank regulatory agencies have delayed the implementation of the new capital rules of the Basel III Accord planned to be phased in starting Jan. 1, 2013.

The Basel III Accord, agreed upon by bank regulators from countries with the largest economies, known as the Group of 20, will require banks to maintain larger capital buffers to protect against losses and the destabilizing impact of financial shocks like those experienced during the financial crisis that began in 2008. The accord has three major goals: correct shortcomings in capital requirements, improve risk management practices, and strengthen transparency and compliance in financial institutions worldwide. Each country is responsible for drafting and implementing the new capital rules.

In the U.S., the campaign spearheaded by the Independent Community Bankers of America (ICBA) to exempt small banks from the capital and liquidity requirements that should apply to larger banks is making good progress. As best expressed by Benjamin Lawsky, head of the New York State Department of Financial Services, “most community and regional banks did not engage in the risky behaviors that led to the financial crisis.”

The delay is indeed a major victory for the thousands of community banks across the nation for whom the new proposed capital and liquidity requirements pose a major threat to their survival and profitability.

The accord mandates banks maintain a level of common equity equal to 4.5% of the bank’s risk-weighted assets, plus an additional 2.5% of equity for a capital conservation buffer. This 7% capital requirement is a significant increase from current levels, which in some cases are as low as 2%.

If applied to large, systemically important banks, these rules would mitigate the risk that the entire global financial system would be dragged down by the failure of one major player, which we saw happen more than once in the crisis years. But applying the same capital and liquidity requirements to community banks is a major concern.  There are more than 7,000 community banks across the nation that provide a major source of credit and banking services through a network of over 24,000 branches and 300,000 employees. The one-size-fits-all prescription threatens the survival and profitability of hundreds of these smaller financial institutions having nothing to do with the stability of the international financial system.

In part 2 of this guest column, the burden on community banks posed by the proposed rules will be discussed.

Edgar Ortiz is President and CEO of Strategic Analytic Solutions LLC, a bank risk management consulting firm. He is the former head of Global Analytics at Dun & Bradstreet, McKinsey management consultant and VP of CRM at GE Capital. He has more than 25 years experience in the financial services sector, risk management and predictive analytics. For more information, visit: www.strategicanalyticsolutions.com.