Where's the Logic in Subjecting Small Banks to Basel III?

The joint U.S. banking regulatory agencies have issued a notice of intent to include all community banks under the revised Basel III initiated capital rules with only limited rule exclusions. They have now opened the proposal to comments by the banks affected. Because of the significance of this proposal, the Independent Community Bankers of America is seeking an extension of time citing the complexity of the proposed standards. In commentary, they have cynically, but aptly suggested that, if these proposed changes become effective, the gallows await most community banks.

Community banks are already held to a higher capital standard than the nation's largest institutions and these Basel III capital proposals only give the regulatory authorities added reason and purpose to increase the current capital levels for community banks, even though, in many cases they would already exceed the proposed Basel III minimums.

These new standards are proposed in an environment of marginal earnings for many community banks. Community banks also have new more restrictive capital options and only limited access to public markets. 

The Basel Committee on Banking Supervision certainly couldn't be considering or worried about the potential damage a $100 million consumer bank in Timbuktu could cause the international monetary or financial system. They would certainly not consider the threat from a $500 million business bank also in Timbuktu that has no function outside the U.S., does not participate in securities activities, initiates no derivatives and whose largest loan is $5 million. Most U.S. community banks just help consumers and small businesses meet their basic banking needs. The committee certainly could not believe that more restrictive capital rules for community banks would better preserve the financial system to halt systemic risks to banks in the U.S. or around the world.

Keep in mind, the average community bank is only one-ten-thousandth the size of Bank of America or any of the 15 largest world banks. Another way to seeing how insignificant these banks are to the world's financial system or to its systemic risk is recognizing that if a thousand U.S. community banks failed, the risk level would only equal about 10% of the asset level of any one of these 15 largest banks.

Recognize that these same community banks provide their share of the funds that are the insurance and protect the taxpayers from the cost of banking failures.

Consider also that no other country has the independent community bank system of nearly 7,000 local and regional banks we do.  Nearly all of the other countries subject to the Basel III rules have fewer than 20 independent banks, most of which are international in scope as are about 20 of our largest U.S. banks. These are the banks that can threaten the system, are a risk to one another and should be the sole concern.

One might think that imposing these capital rules on community banks is part of a government agenda to systematically reduce the number of community banks serving many towns and regions. To impose these new rules would be a further intrusion, without logic and counterproductive to the ability of the community banks to create economic growth and jobs.

The notice of intent to include community banking in the proposed Basel III rules should not be a matter for comment and refinement. It should be discarded as not purposeful or in the best interests of our country. It is a decision that just doesn't make sense and isn't backed by any logic. All community bankers know the regulators can demand increased capital levels as they see fit and any additional complex (as they are) restrictions based on international standards are not necessary and unwarranted.

I don't believe we need to assure the other Basel committee members that we have left no stone unturned by insuring that we have included all 7,000 of our community and regional banks under the Basel III capital proposal. In addition, we don't need and shouldn't have one-size-fits-all regulatory policies.  There is a distinctive difference between the Bank of America-size banks and all the Banks of Timbuktu not only in what they do but the risks they present.

While I won't be writing any letters or making comments to the authorities, I would hope they will look to the logic and common sense of this determination. For the sake of our future and to keep community banks away from the gallows, let's stop squeezing or restricting smaller banks and get back to serving customers in the many numerous towns and neighborhoods nationwide, including Timbuktu. 

Robert H. Smith, the former chairman and chief executive of Security Pacific Corp., is a founder and director of Commerce National Bank in Newport Beach, Calif.