Tuesday, October 23, 2012

In Letter to Fed, House Oversight Chairs Urge US-Tailored Application of Basel III Capital Standards

In a letter to the Federal Reserve Board, House Financial Services Committee Chair Spencer Bachus (R-Ala.) and Vice-Chair Jeb Hensarling (R-TX) urged federal banking regulators to carefully consider the potential consequences of applying Basel  III capital requirements across the board without tailoring them to the unique characteristics of community and regional banks. They asked regulators to ensure that the US financial system remains a diverse mix of community, regional and global financial institutions by structuring regulations to promote that diversity rather than moving towards a system of fewer, larger financial institutions. The letter was also signed by Oversight Subcommittee Chair Randy Neugebauer (R-TX) and Financial Institutions Subcommittee Chair Shelley Moore Capito (R-WV).

While the higher capital requirements contained in Basel III are entirely appropriate for internationally active financial institutions that may pose a systemic risk to the economy, the Chairs noted, the application of these requirements to community and regional banks raises serious concerns. Higher capital requirements will force community and regional banks to hold resources internally instead of providing much-needed credit for small businesses and consumers. The impact of Basel III will be especially problematic for small rural areas served by community banks. They also noted that the U.S. financial system’s strength lies in its diverse mix of community, regional and multinational banks. It is important to ensure that regulations are structured in a manner that promotes and strengthens this diversity rather than moving towards a system of fewer, larger institutions. While acknowledging that the Basel Committee adopted the Basel III Accord in an effort to harmonize capital requirements cross-border, the House leaders believe that the one-size-fits-all approach may make sense in jurisdictions served by a few large and complex financial institutions competing globally, it may prove problematic when applied to the diverse US banking system.