September 27, 2012 / 4:58 PM / 7 years ago

US senators ask regulators to study Basel impact on small banks

* Bipartisan group of 53 senators asks regulators to reconsider Basel

* Group concerned about impact on community banks

By Emily Stephenson

Sept 27 (Reuters) - U.S. bank regulators should weigh whether proposed rules requiring financial institutions to hold more capital would unfairly boost compliance costs for community banks and stifle lending, a bipartisan group of 53 senators said on Thursday.

The group supports efforts to boost capital requirements as a means to strengthen banks, the senators said in a letter to Federal Reserve Chairman Ben Bernanke, Comptroller of the Currency Thomas Curry and Federal Deposit Insurance Corp Acting Chairman Martin Gruenberg.

But they asked the regulators to take another look at the impact of the rules, which would implement an international agreement on bank capital standards known as Basel III, for community banks.

“A strong and viable capital base is vital to ensure financial institutions are able to absorb unexpected loss,” the senators said in the letter.

“However, the complexity of new global rules adds little value to the community institutions which your agencies rigorously regulate and monitor,” it said.

The Basel agreement is part of international regulators’ efforts in the aftermath of the 2007-2009 financial crisis to make sure the global banking system is more resilient. U.S. banking regulators have issued a proposal on how to implement the rules in the United States.

The plan would require banks and other financial institutions to hold amounts of reserve capital that would be calculated based on the riskiness of the assets they hold.

The U.S. rules, which have not been finalized, would be phased in over six years starting in January and would force banks to hold about three times as much basic capital as the last international accord required. The biggest banks would hold even more.

Community banks, who initially hoped to escape the brunt of the new standards, say the plan is too complicated and would boost compliance costs. That could limit community banks’ ability to lend to small businesses and throw up another barrier to the fledgling economic recovery, banking groups argue.

Thomas Hoenig, a former president of the Federal Reserve Bank of Kansas City and current member of the FDIC board of directors, said earlier this month that regulators should scrap Basel III altogether and draft a simpler proposal.

The bipartisan group, led by Senators Pat Toomey, a Republican from Pennsylvania, and Mark Warner, a Democrat representing Virginia, asked regulators to consider potential unintended consequences for community institutions as they finalize capital rules.

“Smaller financial institutions offer unique services to their communities with much less institutional complexity,” Warner said in a statement. “As regulators implement Basel III, we hope they will acknowledge these inherent differences.”

A spokeswoman for the Federal Reserve said all comments on the proposed capital requirements would be considered before finalizing the rules.

Spokesmen for the FDIC and the OCC said the agencies would respond directly to the lawmakers.

The three agencies have extended the comment period until Oct. 22 to give industry more time to weigh in on the new rules.

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