WASHINGTON – For a community bank, digesting more than 900 pages of complex new capital adequacy rules is a cumbersome task. And most of those banks don’t think the rules are needed for banks their size. To help them prepare, the Federal Deposit Insurance Corporation is sending out experts to offer advice.
“The FDIC has put together a pretty impressive set of resources,” said Chris Cole, senior vice president and regulatory counsel for the Independent Community Bankers of America, a trade association. “They’re very good and I think they’ll be very helpful.”
The rules changes are the result of Basel III, a set of international capital standards rolled out in the aftermath of the global financial crisis. The new framework requires banks to hold a higher level of capital relative to assets and narrows the scope of what is considered to be capital.
Written by the Swiss-based Basel Committee on Banking Supervision, Basel III will debut Jan. 1 in the U.S. for large financial institutions. For community banks, that date will be one year later, in 2015.
At a July 11 Senate Banking Committee hearing, FDIC Chairman Martin J. Gruenberg said his agency has “organized a series of outreach sessions focused on community banks to explain and make clear as straightforward as possible the requirements – we’re going to be holding these sessions in each of our six regional offices around the country” Beginning in August.
FDIC spokesman David Barr said compliance experts also will be permanently stationed at the agency’s regional offices to answer questions from the nation’s smaller financial institutions about the new rules, which were derived from the Basel III international banking standards. Barr noted the outreach efforts are not required by law.
There are nearly 7,000 community banks, defined as financial institutions with assets of less than $1 billion, across the country and they make up around 97 percent of the nation’s financial institutions.
“While the resources the FDIC is throwing at this are impressive, the rules themselves are complex, and community banks have to wrestle with a lot of different issues,” said Chris Cole of the Independent Community Bankers of America.
He said changes to the method for determining the riskiness of securitized mortgages and ownership interests in other companies are likely to cause the most confusion for the banks.
Compared with larger financial institutions, community banks have significantly fewer resources for making the transition to the new framework. According to Cole, the nation’s smaller financial institutions are unlikely to have full compliance teams, which tend to appear in only banks with assets greater than $1 billion.
For example, the People’s Bank of Coldwater, Ohio, which has seven branches in west central Ohio and $400 million of assets, often employs external consultants to provide support to its sole compliance officer.
“We don’t all have a full robust compliance department and so, the regulators pointing us in the right direction is a big help,” said Jack Hartings, the bank’s president and CEO.
Hartings also commended regulators for making the final version of the new rules less burdensome for community banks, compared with the draft proposal.
The rules now include a number of concessions for financial institutions with less than $250 billion in assets or $10 billion in foreign exchange exposures. Among those are a waiver from having to recognize accumulated other comprehensive income in regulatory capital calculations and an extension to the deadline for phasing in the new framework.
But Cole said the nation’s smaller financial institutions still need more breathing space.
“The changes are much better than the proposal, but they are not adequate – no,” he said. “We would’ve preferred it if we got a general exemption from Basel III.”
“Basel III was conceived for the larger banks – it was only meant to apply to them, internationally active banks,” he argued. “It was never conceived as something that would apply to a community bank in Kansas.”
Cole said that “the riskiest banks in the country are the big banks, so my take is that the riskiest banks should have the higher capital requirements.”
However, Federal Reserve Governor Elizabeth Duke, a former community banker, had a different view. In her statement at the July 2 Federal Reserve Board of Governors meeting, she emphasized that “having adequate levels of high quality capital is just as crucial for smaller banks as it is for the largest institutions.”
“The recent financial crisis demonstrated that community banks can still be devastated by economic turbulence even when they did nothing to cause the problem,” said Duke. “The banks that were able to withstand the adverse economic conditions and continue to serve their communities were those that started with solid capital positions.”