Weighing the economic risk of Basil III can be daunting

The Mississippi Business Journal recently reported on the demise of brickyards around the state, with the numbers whittled in recent years from a half-dozen to the single surviving yard in Columbus.

The brickyards started dying off about the same time demand for new housing ceased. Many other once-healthy sectors of Mississippi’s economy went into decline as well when the building stopped, banking chief among them.

More recently, slight signs of life have been detected in housing construction in Mississippi and the rest of the nation. This is despite the absence of recovery initiatives from the Obama White House and Congress.

You could forgive executives in the building and banking sectors if they wished the governmental inattention would continue.

Community bankers are still navigating the land mines laid by the two-year-old Dodd-Frank banking reform law. Lawmakers originally conceived this legislation as a much-needed measure to ensure against renewed recklessness by the nation’s giant banks. Ultimately, Congress brought the same hammer down on small banks that it used on the big ones.

Now, community bankers are again finding that size doesn’t much matter to policy makers.

Specifically, the regulators who lead the three federal banking agencies are set to force a new one-size-fits-all capital framework on the nation’s banks. The negative consequences for Mississippi’s home building and banking industries are hard to miss.

The source of worry: A European import called Basel III and signals from the trio of bank regulatory agencies — the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency — that they intend to incorporate Basel III’s capitalization provisions into rules that govern all U.S. banks with assets of $500 million or more. The proposal is to put lending institutions such as the $844-million Citizens Bank of Philadelphia (Miss.) and the $1.4-trillion Bank of America under the same rules for loan risks.

Created by a tribunal of international banking experts after the global banking collapse of the last decade, Basel III is said to be a defense against another crisis by establishing weighted risk-capital rules.

Community bankers in Mississippi and elsewhere in the country believed Basel III had its sights solely on international banks and the U.S. giants that had been deemed to-big-to-fail in the recent collapse.

Along the way the target got adjusted to include banks both big and small.

The significant capital requirements of Basel III could forever change mortgage lending in Mississippi after they are implemented in 2015, as proposed by the Basel timetable. If you double the capital requirement on each loan as Basel III entails, you should expect to see the number of loans halved, one Mississippi banking executive said.

The tendency of Mississippi bankers to issue non-conforming home loans in predominantly rural areas of the state likely didn’t come up during the Basel III discussions in Europe. But that doesn’t make the impact of Basel’s capital risk-weighting rules on those non-conforming loans any less real.

Bankers and other commercial lenders often make these non-conforming loans to Mississippi workers of modest incomes who buy manufactured housing or some other type of property. The loans do not meet required loan-to-value ratios and thus can’t be sold on the secondary market. They do, however, keep roofs over the heads of Mississippians and bring business to the banks.

No one is losing money on the non-conformers, but the capital that must be set aside to meet the risk-weighting rules of Basel III would make the loans too expensive for banks to make, says Mac Deaver, president of the Mississippi Bankers Association.

Lending for more conventional mortgages would be curtailed, as well, according to national banking specialists. They project the $60 billion in new capital that the Federal Reserve estimates U.S. banks would have to acquire would reduce credit by $600 billion.

Mississippi bankers, home builders and others who rely on the housing sector for their livelihoods can keep their fingers crossed some lessening of the risk-weighting for community banks will be part of the final rules for Basel III enforcement in the United States.

But if that begins to appear unlikely, leaders in both the public and private sectors must come up with a way to keep home lending alive. Otherwise, our recovery could hit a brick wall — if we had bricks to build it.

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