The final guidelines for compliance with Basel III are looming on the horizon, and the name of the game is capital requirements. How much is enough? How much is too much? Speaking to reporters recently in Chicago, Comptroller of the Currency Tom Curry suggested that the final set of rules might include some changes to the leverage ratio for big banks, but reiterated that regulators are still calibrating the capital requirements.

Regulators have previously set late June as the working goal for a more or less final set of guidelines for compliance with Basel III, and while the OCC, the Fed and the FDIC have all generally withheld comment for this story, citing the ongoing rulemaking process, banks can probably expect to see a mix of risk-based measures and leverage ratios and different requirements for different sized banks, sometime early this summer.

“The leverage ratio is risk-blind, whereas the various other ratios tend to be risk-sensitive. I think you can make a debate about whether they’re sensitive enough. Any degree of risk modeling is going to be subject to some model error, though,” commented Wayne Abernathy, executive vice president of financial institutions policy and regulatory affairs at the American Bankers Association.

“I think the regulators have been doing so much work on risk based measures that they don’t want to abandon the exercise. They want to improve it,” he continued. “They have recognized that their models are imperfect, so there’s a need to have some measures of capital like a leverage ratio that pick up the imperfections and catch those risks that they can’t foresee.”

Small Banks Exempt?

Community banks have long protested that some of the provisions of Basel III would crimp their ability to lend in their markets and further that the Basel III requirements are an unfair burden to institutions that, by and large, did not engage in the kind of risky practices that lead up to the recent financial crisis.

While community banks are not likely to be totally exempt from the rules, Chris Cole, a senior vice president and senior regulatory counsel for the Independent Community Bankers of America, was hopeful that smaller banks might at least get a few exemptions to some of the more complex pieces of Basel III, like certain risk weighting rules and the inclusion of AOCI in equity capital.

But he conceded, “All the banks are going to be subject to higher capital standards; I think that’s coming.”

Basel III may not be the only capital requirement banks have to contend with, either.

Senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, have proposed legislation that would set out three tiers of capital requirements. Under the Terminating Bailouts for Taxpayer Fairness Act of 2013, megabanks – those over $500 billion – would have to set aside capital equal to 15 percent of assets. For banks on the next tier, between $50 billion and $500 billion, that capital requirement drops to eight percent. The bill would not impose additional capital requirements on community banks, and it’s garnered a lot of support from that contingent of the banking industry.

Interestingly enough, Cole adds, it’s the mid-sized banks that could stand to gain the most from Brown-Vitter if larger banks downsize or break up to avoid the 15 percent capital requirement.

And he was quick to point out that Brown-Vitter goes beyond capital requirements.

“It’s not just a big bank bill,” he pointed out. “It also addresses the needs of community banks, as far as decreasing regulatory burdens.”

Among the particulars, the bill includes an expanded definition of “rural” for purposes of the qualified mortgage definition, an exception to the annual written privacy notice requirement when the financial institution has not changed its policies, and an exemption from some of the data collection requirements under Dodd-Frank.

Regulators had indefinitely pushed back the January start date for implementation of Basel III’s guidelines, and supposedly, the final rules will come out sometime this summer. But not so fast!

“There’s one thing that could delay this whole process,” Abernathy said. “There is an effort on Capitol Hill, which we support, that would require regulators to do a detailed economic analysis of what the impact would be before they finalize a rule. That way you’d understand what this impact would be on the communities where smaller banks live.”

However, that effort – the Basel III Impact Study Act introduced by Sen. Richard Shelby of Alabama – is still pending before the Senate Committee on Banking, Housing, and Urban Affairs.

And even if Shelby’s bill does gain momentum in the Senate, if regulators manage to meet their early summer target, it may be all for naught. 

Email: lalix@thewarrengroup.com