In a move that takes immediate pressure off of community banks in Mississippi and elsewhere in the nation, federal bank regulators say they do not expect to enact new capital requirements on Jan. 1 based on the Basel III International Accords.
The Office of the Comptroller of the Currency said in a Nov. 9 statement the delay stems from the massive volume of comments regulators received on the Basel III capital proposals “and the wide range of views expressed during the comment period.”
“As members of the Basel Committee on Banking Supervision, the U.S. agencies take seriously our internationally agreed timing commitments regarding the implementation of Basel III and are working as expeditiously as possible to complete the rulemaking process,” the OCC said. “As with any rule, the agencies will take operational and other considerations into account when determining appropriate implementation dates and associated transition periods.”
The OCC, Board of Governors of the Federal Reserve and the FDIC had announced in June that they intended to begin initiating the new capital requirements starting Jan. 1.
David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA), said after the delay announcement the willingness of regulators to take extra time to study banker comments is a positive sign.
He said he hopes the delay is a signal “that the regulators are rethinking their problematic Basel III rule and are going back to the drawing board for a new proposed rule.”
The rules as proposed this summer would be felt “most acutely by residential, commercial and multifamily real estate borrowers, investors and lenders in the form of tighter credit and higher costs.”
In Mississippi bankers and others say they worry the allocation of risk-weighting in setting capital requirements on real estate loans could triple the amount of money required to be set aside for making the loans. The result — costlier loans followed by a slowdown in mortgage lending.
Craig Landrum, a banking attorney and partner at Jones Walker in Jackson, said he has received reports that the overwhelming response from community bankers led regulators to delay initiating the new regulations.
“I think they got a few more comments than expected,” he said of an official comment period that ended Oct. 22.
Landrum said last week he was not surprised by the strong reaction of community bank executives, considering the proposed rules “radically change how banks make loans in rural areas.”
Regulators must decide whether the risk weighting designed for large money center banks is workable for community banks, Landrum said. “What we’re hearing is that… all three bank regulators are taking these comments very carefully.”
He said regulators will review the comments, summarize them and put them into various categories. “Then they decide whether to amend the proposal or go ahead with it.”
Landrum said he is advising his banking clients not to expect a decision until March, at the earliest.
Stevens said the property lending industry’s health hinges on regulators re-proposing Basel implementation rules that “more appropriately allocate risk-weights on real estate-related assets, whether they be residential, commercial or multifamily loans and securities and/or servicing rights.
“Otherwise, credit for real estate transactions will tighten and consumer and borrower costs will go up, as banks reduce their real estate lending and mortgage servicing business.”
As now framed, Basel III would gradually force 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,
The proposals are the work of an international group of bank regulatory experts who made up the Basel Committee on Banking Supervision. 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.
When the Group of 20 approved the accords, 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 bank holding companies 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 in October. “A $20 million bank that serves a community will be impacted.”
In rural parts of Mississippi, a sizable portion of the home lending market is in “non-conforming loans” that are held by an individual bank instead of sold on the secondary market. The new risk weighting is going to make this sort of lending much more expensive for community banks, Deaver said in a September interview.
“Under the new formula, they are going to be considered more risky than before,” he said.
Landrum said the mortgage loans most at risk for extinction — or at least curtailment — are short-term balloon loans, often secured by modestly priced housing on large amounts of property. Community banks keep the loans because the secondary markets don’t buy them, he said.
Looking at the Basel III rules, Landrum said: “It’s strange to me that an unsecured credit card loan has a lower risk-weighting than John Doe’s residential loan in Madison that is on a balloon.”
Deaver’s Mississippi Bankers Association joined counterparts from around the country last month in urging the regulators to delay implementing Basel III.
In its comments, the MBA said the new risk-weighting rules 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.
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.