New global banking standards conceived in the aftermath of the Great Recession intended to prevent a repeat of the financial crisis has tens of thousands of community bankers crying foul of the consequences on those who didn’t cause the crisis.
Leaders of local banks, including First Bank of Georgia, Savannah River Banking Co. and Georgia Bank & Trust, have added their voices against the implementation of Basel III, international standards that are being contemplated by U.S. banking regulators, on smaller banks.
The Swiss-based Basel Committee on Banking Supervision proposes reforms that change the amount of capital that banks need to hold in reserve and change the risk assessment of certain kinds of assets. Those reforms are in the hands of the Federal Reserve Board and other bank regulatory agencies who are now weighing comments from the banking industry.
The Independent Community Bankers of America reported that more than 17,000 community bankers and their allies, including Georgia Bank & Trust, have signed a petition calling on the regulators to exempt small banks from the proposed regulations. Other local banks, such as First Bank and Savannah River, have placed comments with the Georgia Bankers Association, which has also chimed in on the proposals.
In Georgia Bank & Trust’s letter to the Fed and FDIC, the Augusta-based bank raises concerns that having to accumulate more capital will restrict its ability to lend to small business, “the sector of the economy that creates most jobs.”
“The community banks are not what created the mess on Wall Street. But it penalizes community banks to where we really have the potential of stymieing lending at the time when we need it most in recovery mode,” said Ron Thigpen, the chief operating officer for Georgia Bank & Trust.
The rule of thumb is that $1 in capital equals $10 in lending capacity, said David Oliver, the communications director for the Georgia Bankers Association. So millions of dollars that need to be set aside for a buffer equals tens of millions of dollars that doesn’t go to commercial and residential lending.
Those that don’t meet the new requirements would face the decision of either shrinking the number of loans on the books or trying to raise money from shareholders in order to do the same amount of business it was doing before the new rules.
“So you’ve either got to not make new loans, or once loans come due you don’t renew them … so you become a smaller institution,” Oliver said. “Or you would have to raise new capital, which is difficult in the current economic climate.”
For small banks, there are the hurdles of a limited number of shareholders and small communities that have already been asked for capital campaign contributions. “They just don’t have the same sources of capital that a lot of large institutions have access to,” Oliver said.
The Independent Community Bankers of America point to the proposed new rules as another example of fixing what went wrong on Wall Street coming to roost on Main Street.
“These proposed capital standards were designed to reduce the risks posed by the large and complex financial institutions that contributed to the worst financial crisis since the Great Depression. Applying overly complex capital rules on community banks will fuel concentration in the banking industry, leaving small businesses and consumers with fewer banking options,” said ICBA President and CEO Camden Fine.
ICBA’s petition calls for allowing community banks to continue using Basel I risk standards, which more accurately align their regulatory capital with the type of assets they hold and the relationship model they follow.
“We worked with the Georgia Bankers Association on their comment letter and feel good about the regulators,” said First Bank of Georgia’s chief executive, Remer Brinson. “They’ve got a history of looking at those comment letters and taking them seriously and making adjustment based on some of the real concerns the bankers have.”
Brinson said the Basel rules are well meaning in that they’re trying to address the riskier parts in the banking industry, but they might not have the effect of achieving the goal.
“Previously, on other Basels, it has never applied to all financial institutions. They’ve inserted that in this one. That’s why it is more of an issue for all of us,” Brinson said.
Implementation would start in 2015, if adopted, to give banks time to figure out compliance, Oliver said.
“It will take banks time to do the calculations and adjust their business practices, their balance sheets and ability to meet those capital requirements,” Oliver said.
The comment period closed Oct. 22 and regulators received more than 700 comment letters. Thigpen said regulators likely won’t get through all of the comments until springtime.
“There is a groundswell of opposition from the industry and Congressional legislators who recognize the potential negative impact on both the banks and the economy,” Thigpen said. “I’ve been in banking 41 years and I do not recollect from a bank management standpoint the kind of energy ever having surrounding a single issue as does this.”