OCC's Curry Signals Basel III Compromise for Small Banks

SAN DIEGO — Comptroller of the Currency Thomas Curry suggested Monday that regulators are working on ways to ease the burden of pending Basel III capital and liquidity requirements for small banks.

Curry was the latest in a line of regulators, including Federal Reserve Board Chairman Ben Bernanke, that have tried to simultaneously defend the need for higher capital requirements laid out in the plan while signaling a lighter touch in other areas for community banks.

"We will be taking a fresh look at the possible scope for transition arrangements, including the potential for grandfathering, to evaluate what we could do to lighten the burden without compromising our two key principles of raising the quantity and quality of capital and setting minimum standards that generally require more capital for more risk," Curry said in a speech here to the American Bankers Association.

For some bankers attending the event, Curry's remarks were a positive sign.

"I like his willingness to sit down and talk, like when he told us today to send him specific examples of the impact of Basel on your individual bank," said Steve Swiontek, chairman and president of Gate City Bank, an OCC-regulated institution in Fargo, N.D. "He talked about the possibility of grandfathering in some exemptions and phasing in certain types of things.

"He understands that there are regulations that have an impact on earnings, as far as adding expenses, and what can we try to do to minimize the costs of these regulations. I've been very pleased with him and what he has done."

Others remained skeptical.

"As far as I am concerned, it is the same song but a different verse," said Jack Ersman, a director at ViewPoint Bank in Plano, Texas. "I always hear from regulators that they are here to help and they are interested in our problems and so forth. But at the end of the day you generally wind up with more regulation and more oversight."

Since regulators released a proposal in June to implement Basel III, community banks have become increasingly concerned about the impact of the plan, with bankers expressing outrage to regulators during in-person meetings and conference calls.

While bankers generally accept that they must comply with higher capital ratios, small banks object to certain risk-weightings in the plan. They argue that regulators failed to take into account small and midsize banks when writing the proposal.

But Curry insisted that wasn't the case, and repeated that certain aspects of the final rule will apply only to the largest, most complex banks. "It may sometimes seem that regulators are completely insensitive to regulatory burden," he said. "In preparing the June" proposal "we did actually worry a lot about three sorts of burden: the short-term costs of simply digesting the rules; the long-term costs of developing and implementing any procedures and systems needed to comply; and then of course the costs of increasing capital."

Curry cited several examples where smaller institutions would likely be exempted and where regulators will provide additional analysis on the potential impact on community banks.

For example, he said the countercyclical buffer, which calls on banks to shore up funds in good times, will only apply to the largest banks. The so-called advanced approach, a more complex way to calculate capital requirements, will also not apply to small banks, Curry said.

Curry cited a particular issue for bankers, which is the treatment of accumulated other comprehensive income. He said regulators would take "a very serious look at" potential problems as they comb through comment letters, which are due by Oct. 22.

Bankers are worried that unrecognized losses and gains will create unnecessary and even unmanageable capital volatility, if they flow through into the regulatory capital numbers.

"We recognize that the extra volatility that such an AOCI pass-through would cause would be expensive and difficult to manage — a source of significant regulatory burden — especially to banking institutions, through mutual thrifts, that do not regularly access the short-term capital markets," he said.

Regulators, he said, are also closely looking at the impact of rules on high-volatility commercial real estate and residential mortgages.

Curry pointed to the necessity of higher capital in such risky areas, but said regulators may change their approach. "We recognize that the way we proposed to set minimum capital levels for these assets based on such measures as loan-to-value ratios, or singling out some balloon mortgages as especially risky, may impose a serious burden on many community banks and thrifts, particularly when applied to existing mortgages or if phased in too quickly," Curry said.

Community bankers for the most part had expected the majority of the Basel III plan, which dictates the quality and quantity of capital that institutions must hold, to apply to them, including a core requirement that banks hold 7% in common Tier 1 capital.

But to their surprise, the proposal upped the ante for the roughly 7,000 smaller institutions by changing the risk-weighting calculation for certain assets, including U.S. government securities, corporate exposures and residential mortgages.

Community banks had expected to be allowed to stay with an earlier edition of the Basel accord, which was initially adopted in the late 1980s.

Some bankers said their local examiners have been supportive of their efforts to win exemptions from the proposal.

"We're encouraged a little bit more by the local regulators to write in and fight some of this," said Michael Bender, chairman and president of Midwest Regional Bank in Festus, Mo. "It seems like the state agencies aren't necessarily for some of this and they're encouraging us to fight this."

The Conference of State Bank Supervisors sent a letter to regulators early this month objecting to the plan, while 53 senators have also urged the agencies to move cautiously in applying Basel III rules to small banks.

In an interview after the speech, Curry declined to discuss whether regulators will change the risk-weighting calculation for small banks. But he did say regulators are looking for more feedback based on a calculator the agencies released that helps institutions estimate their capital requirements under the proposal.

"Hopefully we'll hear about how the rules will affect specific institutions," Curry said. "The estimator is part of the comment [process]. Initially people weren't sure how to use it, but we've made an effort to make it as easy to use as possible. There are some assumptions built in, but the idea behind it is to give you a rough estimate."

During his speech, Curry reiterated that regulators are not likely to reduce the overall level of capital requirements laid out in the plan, including a new capital conservation buffer of 2.5%. He also said certain changes to the quality of capital must stand.

"Isn't it prudent policy to exclude from regulatory capital those instruments that cannot be trusted to be there when they are most needed to absorb losses — no matter where the idea originated?" Curry said. "So too is the idea of a capital conservation buffer: if a bank or thrift gets close to its minimum capital ratios for whatever reason, shouldn't it be thinking about limiting bonuses and dividend distributions?"

Rick Robertson, president and chief executive of Croghan Colonial Bank in Fremont, Ohio, said that he can accept higher capital levels but that other parts of the plan worry him.

"Bankers understand that additional capital is required, and I am hoping that people also understand that the rules could be way too burdensome for community banks," Robertson said. "Hopefully we find a blend through the process."