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CSBS Opposes Complexity of Basel III and Standardized Approach Proposals


Oct 17 - The Conference of State Bank Supervisors has submitted two comment letters on federal proposed rules implementing the Basel III capital accords and a standardized approach for risk-weighted assets. In the letters, CSBS called for a more effective and less complex capital framework. 

In the letters submitted to the federal banking agencies, CSBS expressed general support of the agencies’ efforts to improve the level and quality of minimum required capital standards for the U.S. banking system, but raised serious concerns regarding the agencies’ proposed approach to implementing the rules. 

In the Basel III comment letter, CSBS underscored the critical need of the agencies to find an appropriate balance to achieve a stable banking system which is attractive to capital, and can serve as the backbone to a vibrant and diverse economy.  “In our view, the [Basel III] proposed rule is one of the most significant public policy matters facing the financial sector,” wrote John W. Ryan, CSBS president and CEO. “The appropriate level of capital should enhance the resiliency of the banking sector, allowing institutions to remain solvent through the economic cycle.”

While CSBS supported the agencies’ efforts to increase the minimum required capital, the organization recommended scaling back the scope of the proposed rule to apply only to institutions covered under Basel II, as indicated in the international agreement. CSBS would support a separate rulemaking to address the minimum capital requirements, but believes the Basel III framework would introduce undue complexity to the capital planning process for many banking organizations.

In the Standardized Approach comment letter, CSBS detailed strong opposition to the proposed rule to revise the risk weights for risk-based capital citing a number of concerns, including the negative effect the agencies’ proposed approach will have on bank lending in traditional mortgage products, an overly complex framework, and a lack of empirical support for the proposed risk weights.  “As we seek to improve the quality and quantity of capital, we believe it is important to resist the temptation to address every financial weakness through capital,” Ryan wrote.  “We must seek to apply lessons learned to improving risk management and the supervision process.  If not, we will continuously seek to make the industry more risk averse, which will curtail access to credit and harm economic growth.”

CSBS asserted that it is imperative the agencies, before advancing the proposals, further consider and fully understand the potential impact these proposals will have on capital in banks and, more importantly, bank behavior in lending decisions.  CSBS strongly encourages the agencies to undertake a larger study to evaluate long-term capital standards under the framework that meets the needs of regulators and is consistent with the variety of business models of our banking industry.

CSBS’s comment letters can be viewed here.