The train wreck named Basel III has been delayed, but this is no time for bankers to relax. Far from it, according to speakers at the Missouri Bankers Association’s Executive Management Conference in Kansas City last month. In fact, one special-interest session was devoted to potential impacts affecting information technology and operations, examinations and regulation, and bank franchise values.
“We’re going to get some form of Basel III,” said Don Hutson, leader of the session and national industry partner for BKD CPAs & Advisors in St. Louis. “There is going to be a standard out there and we need to get ready for it from an operations standpoint.”
The regulators’ proposed Standardized Approach for risk-weighted assets applies to all banks, regardless of size or international activity, he pointed out. It becomes the new “Basel I,” replacing current Basel I calculations; changes the way risk-weighted asset denominators are calculated; eliminates dependence on external credit ratings; and has a proposed effective date of Jan. 1, 2015.
Deducted from common equity Tier 1 capital and excluded for RWA and leverage exposure are goodwill and other intangibles; mortgage servicing assets in excess of 10 percent of CET 1; deferred tax assets arising from operating loss and tax credit carry-forwards, net of valuation adjustments and deferred tax liabilities (which don’t apply to Sub S corporations).
RWA calculations are unchanged for credit exposures to the U.S. government and agencies; government-sponsored enterprises; U.S. depository institutions and credit unions; and public sector entities such as states and municipalities. Corporate exposures are unchanged as well, Hutson pointed out.
As complicated as Basel III is, technology will be important in dealing with it, pointed out Steve Shoulta of Computer Services Inc. in Paducah, Ky. “Be sure to tell the computer what you want,” he advised. “It puts out what you tell it to.” For example, there will be multiple categories for 1-4 family mortgages depending on lien status, loan-to-value and past due characteristics, he explained.
The FDIC representative on the panel, Frank Hughes of the Kansas City region, listed the key regulatory issues as volatility and capital impact from inclusion of accumulated other comprehensive income; S-corp and capital conservation buffer; past-due risk weighting; management information system upgrades and resources; impact on lending practices; and general regulatory burden.
Hughes left the MBA members with this slightly comforting thought: “The FDIC estimates that 90 percent of banks would be in compliance if Basel III were implemented now.”
Regulation in general and the looming specter of Basel III specifically are having a dampening effect on mergers and acquisitions involving community banks, reported Bob Wray of the Capital Corp. in Overland Park, Kan. His firm, which advises community banks on M&A, has more sellers than buyers. “We do have buyers,” he said, “but they are concerned about how capital will be affected by Basel III.” Values will be lower as a result, he pointed out, and yet another issue facing buyers is that many communities lack sufficient loan demand to offset increased regulatory costs.
FDIC Vice Chairman Thomas Hoenig in a general session speech criticized Basel III and warned of continued competitive inequities enjoyed by the largest banks. “I oppose Basel III, but not just for community banks,” he said. “It is destructive to the banking system as a whole. It is a central planner trying to forecast risk that changes from day-to-day.”
In addition to their other competitive advantages, the largest banks are less-stringently examined than community banks, Hoenig pointed out, and this would not change with Basel III. When community banks are examined, regulators look at loans, investments and operations. “We need to reinitiate full-scope exams for the largest institutions,” he argued. “Their embedded examiners and targeted exams are not full-scope exams.” If these banks are criticized, there should be consequences, in his view.
“Then you will have uniformity,” Hoenig told the MBA members. “You are the same as the largest banks except for capital levels and exams. That is my criticism of Basel III.”
He pointed out that following the delay in implementation of the proposed new rules, the FDIC is deeply involved in international deliberations over disputed issues. He sees his agency’s role as leading with the U.S. position as opposed to following Europe’s lead.
Also at the conference, the sometimes elusive concept of high performance was explored in a special interest session led by Scott Brown, regional sales manager for Banker’s Dashboard of Stockbridge, Ga. “There are not a lot of home runs out there, not much loan growth,” he said. “Think about bunt singles, little things that get you where you want to go.”
He advised “taking customer service off the table” and encouraging the entire team to think strategically. “What differentiates your bank?” he asked. “How will you achieve your growth objectives?” He advised knowing where you are now and acting today like the bank you expect to be three years from now. “Embrace change,” he urged the MBA members.
Facing Basel III and still-to-come regulations spawned by Dodd-Frank, not to mention a difficult low interest rate environment, do they have any choice?
Bill Poquette is editor-in-chief of BankNews.
Copyright (c) January 2013 by BankNews Media