Letter to Chairman Bernanke, Comptroller Curry and Acting Chairman Gruenberg - Impact of New Basel III Capital Standards on Community Banks

Letter

U.S. Senators Pat Toomey (R-Pa.) and Mark Warner (D-Va.) today led a bipartisan letter to Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corp. Acting Chairman Marty Gruenberg and Comptroller of the Currency Tom Curry urging financial regulators to consider the impact new Basel III capital standards would have on community banks. The letter is signed by a majority of U.S. Senate members.

In the letter, the senators expressed their support for efforts to enhance capital standards for banks but urged regulators to consider the important differences between large, complex financial institutions and community banks. Community banks have little or no access to capital markets, and raising funds is often challenging. The proposed capital rules are so complex and expensive to comply with they may significantly diminish the ability of community banks to continue lending in their respective communities.

"Community banks play a vital role in the economic development of our cities and towns," Sen. Toomey said. "In Pennsylvania, many families and small businesses rely on local community banks to access the loans they need. I hope our regulators will consider the important role community banks play and the crucial differences between community banks and larger institutions."

"We all know after the recent crisis that banks need more and better capital," Sen. Warner said. "One of the strengths of the U.S. banking system is its diversity, and that means we can't impose a one-size-fits-all approach. Smaller financial institutions offer unique services to their communities with much less institutional complexity. As regulators implement Basel III, we hope they will acknowledge these inherent differences."

In addition to Sens. Toomey and Warner, the letter is signed by 51 senators, including Sens. Kelly Ayotte (R-N.H.), John Barrasso (R-Wyo.), Max Baucus (D-Mont.), Michael Bennet (D-Colo.), Roy Blunt (R-Mo.), John Boozman (R-Ark.), Scott Brown (R-Mass.), Richard Burr (R-N.C.), Saxby Chambliss (R-Ga.), Dan Coats (R-Ind.), Tom Coburn (R-Okla.), Susan Collins (R-Maine), Kent Conrad (D-N.D.), John Cornyn (R-Texas), Mike Crapo (R-Idaho), Mike Enzi (R-Wyo.), Lindsey Graham (R-S.C.), Chuck Grassley (R-Iowa), Kay Hagan (D-N.C.), Orrin Hatch (R-Utah), John Hoeven (R-N.D.), Kay Bailey Hutchison (R-Texas), James Inhofe (R. Okla.), Johnny Isakson (R-Ga.), Mike Johanns (R-Neb.), Ron Johnson (R-Wis.), John Kerry (D-Mass.), Amy Klobuchar (D-Minn.), Herb Kohl (D-Wis.), Jon Kyl (R-Ariz.), Mary Landrieu (D-La.), Mike Lee (R-Utah), Joe Manchin (D-W.V.), Mitch McConnell (R-Ky.), Bob Menendez (D-N.J.), Jerry Moran (R-Kan.), Lisa Murkowski (R-Alaska), Ben Nelson (D-Neb.), Bill Nelson (D-Fla.), Rob Portman (R-Ohio), Mark Pryor (D-Ark.), James Risch (R-Idaho), Pat Roberts (R-Kan.), Marco Rubio (R-Fla.), Jeanne Shaheen (D-N.H.), Olympia Snowe (R-Maine), Debbie Stabenow (D-Mich.), Jon Tester (R-Mont.), John Thune (R-S.D.), Roger Wicker (R-Miss.) and Ron Wyden (D-Ore.).

A copy of the letter is below:

The Honorable Ben Bernanke The Honorable Tom Curry
Chairman Comptroller
The Federal Reserve System Office of the Comptroller of the Currency
20th Street and Constitution Avenue, NW 250 E St., SW
Washington, D.C. 20429 Washington, D.C. 20219

The Honorable Marty Gruenberg
Acting Chairman
Federal Deposit Insurance Corporation
550 17th St., NW
Washington, DC 20429

Dear Chairman Bernanke, Comptroller Curry and Acting Chairman Gruenberg:

We support your efforts to improve and enhance standards for banking organizations in the United States in light of the recent financial crisis. A strong and viable capital base is vital to ensure financial institutions are able to absorb unexpected losses. However, in developing rules to meet these objectives, we strongly urge the Agencies to consider the impact that applying standards developed for large, complex institutions will have on the unique and vital role that community banks play within the U.S. financial system.

Community banks are an important source of personal and business lending in communities across the country. In many areas, small institutions are the only ones that provide direct local services and have a stake in the success of their communities. These institutions are different from many larger institutions in size and scope, and we do not see the value in requiring them to adhere to regimes designed to manage larger and more complex risks.

As you know, community banks have little or no access to capital markets. In most cases, they must rely on the bank's officers, directors and shareholders to raise additional capital. Raising capital for community banks in the best of times is challenging and nearly impossible in times of economic stress.

We are concerned that the proposed capital rules could exacerbate these funding challenges. For example, the proposed rules are extremely complex and require the reporting and maintaining of granular data, greatly increasing the compliance burden on community banks. In fact, some small banks may be unable to service the future needs of the communities they serve because they simply do not have the resources to meet the new compliance obligations. In addition, the new increased capital requirements for U.S. Treasury and other securities that banks hold in their investment portfolios, could impact how small banks manage liquidity and interest rate risk.

We are also concerned that these changes could have significant, unintended consequences for community banks. The proposed rules could make it even harder to raise needed capital. Community banks may change their business plans as a result of the rules, thereby reducing lending and economic growth in the communities in which they serve.

We understand that capital is an important source of strength in our financial system. However, the complexity of new global rules adds little value to the community institutions which your agencies rigorously regulate and monitor. As you review these proposed rules, we respectfully request you consider these unintended consequences and their effect on the viability of community banks across the country.