With a comment period on the proposed regulations ending Oct. 22, the Mississippi Bankers Association joined its national counterparts in urging the Federal Reserve, the FDIC and Office of the Comptroller of the Currency to reject participation in the international financial accords — or to at least scale back the scope to exempt banks with assets of $15 billion or less.
In its comments, the Mississippi Bankers Association predicted the many small banks that make up the association’s membership would be overwhelmed by the regulatory complexities of Basel III and ultimately be unable to engage in the kind of home mortgage and commercial lending that has become their bread and butter. The result: Closures and takeovers by larger banks, the MBA says.
The fabric of Mississippi’s small communities would be jeopardized, the association said in its five-page letter to regulators.
“If these banks become branches of regional or international institutions, the towns and communities will be truly harmed as jobs are reduced and community support begins to vanish,” the MBA said.
“It is important that you seriously consider the potential economic consequences these regulations could have in areas that are already extremely poor.”
Basel III starting in January gradually forces banks of all sizes to greatly increase their levels of regulatory capital and to apply a complex risk-weighting system to loans on home mortgages, commercial enterprises and other types of lending. Bankers expect to have to set aside two to three times as much reserve capital on many types of loans than is now required.
An international group of bank regulatory experts who made up the Basel Committee on Banking Supervision created the proposals. As its name implies, Basel III follows two earlier versions of accords going back to 1992. The latest version has received the endorsement of the Group of 20, an organization of industrialized nations, including the United States, that represent 85 percent of the worldwide economy.
However, few expected the rules to apply to any but the largest U.S. banks that were active in international markets, according to the Mississippi Bankers Association. Later, U.S. bankers learned the scope of the regulations would include banks with assets of $500 million and above and would apply the risk-weighting and capital requirements to banks of even smaller sizes, said Mac Deaver, president of the Mississippi Bankers Association.
“Those rules apply to banks of all sizes,” he said in an interview last week. “A $20 million bank that serves a community will be impacted.”
Basel III’s capital requirements and other provisions have received preliminary approval from the nation’s three bank regulatory entities: Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency. They would incorporate the regulations into an integrated framework with provisions of the Dodd-Frank banking and financial reform law.
On the national front, the American Bankers Association and the Mortgage Bankers Association expressed to regulators many of the same concerns raised by the Mississippi Bankers Association in its comments. The national organizations, while acknowledging the need to quell the recklessness of giant banks and to ensure adequate capitalization, said the one-size-fits-all approach is ill-suited for America’s diverse banking sector. Enactment would deal a setback to the nation’s economic recovery in general and the real estate industry in particular, the Mortgage Bankers Association says.
Basel III, said the Mortgage Bankers Association, has “the potential to reduce the supply of mortgage credit and collectively to prevent significant private capital from returning to the real estate finance market.”
In a strongly worded introduction to his organization’s remarks, American Bankers Association CEO Frank Keating said importing Basel III to the United States “would cause capital to amplify economic volatility, making it more difficult for banks to serve customers in hard times and more expensive in even the best economic conditions.
“Perhaps most troubling for bank customers, Basel III would punish institutions that make mortgage and small business lending a significant part of their operations. Putting a scarlet letter on these assets will only cause a retraction in financial activity when families, businesses and our economy can least afford it.”
Deaver, the Mississippi Bankers Association president, said meeting Basel III’s new capital requirements – 6 percent for Tier One reserve capital, would appear not to be a problem for the state’s banks, considering their capitalization levels. The problem is in the way Basel III sets the calculation, he said.
The new risk-weighting rules, for example, require banks to set aside two to three times the capital for a home loan than is now required. The money that is diverted to the risk weighting is no longer eligible to be counted as Tier One capital. “When you’re putting up three times as much to support that loan… that 6 percent is now going to be around 9 percent,” Deaver said.
Further, if interest rates go up and bond values go down, banks must offset that with additional capital reserves, according to Deaver. A rush for new capital is not what Mississippi and the rest of the nation needs during this fragile banking recovery, he said.
Mississippi bankers in the not-too-distant future could find that “the rules have changed so you don’t have the level of capital you thought you had,” he added.
Especially worrisome, Deaver said, is that Basel III does not grandfather current loans. Banks would have to review every loan on their books, recalculate with the new risk weighting and begin setting aside money to meet the new rules, he said.
The reliance of Mississippi home mortgage and commercial borrowers on non-conforming loans makes the state’s banking sector especially vulnerable under Basel III rules, Deaver said. “Our banks offer customers alternative mortgage loans with features such as balloon payments or variable interest rates, but that amortize over a more traditional period in order to make them affordable to the borrower,” the MBA wrote in its comments to regulators. “These loans bear 10-30-year amortizations, are routinely renewed at favorable rates and costs and have no history of default.”
Without such loans many people in Mississippi communities would be shut out from obtaining affordable mortgage credit, the MBA says.
On the commercial lending front, the risk weighting for loans on “high-volatility commercial real estate,” or HVCRE, would prevent business people across Mississippi from opening a new restaurant, hardware store or retail shop, the association says. The proposed rule increases the risk weighting by 50 percent for commercial development loans unless the borrower can come up with at least 15 percent of the completed project’s appraised value. For a local entrepreneur or young professional, the 15 percent requirement is a likely deal-killer, the MBA says.
Here’s an example of risk weighting provided by the FDIC:
If a bank makes a five-year-balloon loan on a residence and the loan is 85 percent of the value of the property (Loan-to-Value), that loan would be risk weighted at 150 percent. Currently, the risk weight for such a loan is 50 percent. Under Basel III, the bank would have to have three times as much capital as under current standards to back such a loan.
“You can see that with a large volume of these loans, this would have a significant impact on such lending activity,” Deaver said.
Among the changes sought by the MBA are an elimination or reduction in the risk weighting for residential and high-volatility commercial loans and a grandfathering of existing loans under current risk weighting guidelines.
“We have received an outpouring of opinions from our members,” the MBA said, “that all share the same conclusion: The cost of complying with these new standards will simply be too much, and will not put Mississippi banks in a stronger position.”