Small Bank Fears Loom Large in Basel Talks, FDIC Chief Says

WASHINGTON — Federal Deposit Insurance Corp. Chairman Martin Gruenberg gave further signals Tuesday that regulators are seriously considering easing the impact of proposed Basel III capital standards on community banks.

Gruenberg devoted much of his remarks before a Washington meeting of the American Bankers Association to issues facing the community banking sector, which has been most vocal in criticizing the regulators' June Basel proposals.

He said comment letters from smaller institutions responding to the proposals focus mainly on three issues worrying community banks: the capital risk weights put forth for mortgages, how the value of certain securities — known as accumulated other comprehensive income — affects required capital levels and the treatment of trust-preferred securities. (The proposal would implement the latest international Basel accord on banks' capital levels; comments were due in October.)

"All three of these issues are the focus of a lot of attention by the regulators, and I think it's our hope that we can be responsive," Gruenberg said. "I don't want to say more than that at this point, but we're paying a lot of attention."

He also reiterated details about a recent FDIC study detailing the history and evolution of the community banking system. The study found, among other things, that smaller institutions which stick to a traditional model of relationship lending and stable funding sources are able to persevere during crises while a riskier strategy can spell doom.

He said the research is consistent with what regulators find when they are evaluating troubled institutions.

"The FDIC board has to approve a case for each" failed institution, and "what is striking about them is they are not reflective of the traditional community bank business model," Gruenberg said.

The agency's inspector general recently reported that community banks seized by regulators commonly had the following characteristics: overly fast growth, high concentrations of risky loans and volatile funding such as brokered deposits.

"I got to tell you, there is basically … almost a standard paragraph in every one of our failing bank cases identifying those factors," Gruenberg said. "Often times" there is "another paragraph saying that a new person came in in the early 2000s to run the bank who thought there was a faster way to make money."