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CSBS: Approach to Basel III Respects Industry Diversity


July 3 - The Conference of State Bank Supervisors released the following statement by John W. Ryan, CSBS president and CEO, following the Federal Reserve's release of its final rule on Basel III.

"The Conference of State Bank Supervisors appreciates the approach taken today by the Board of Governors of the Federal Reserve System to implement improved capital standards.  The federal banking agencies demonstrated their ability to be responsive to the concerns of state regulators, Members of Congress, and the industry in the interest of communities and consumers throughout the country. This approach respects the diversity of the industry by differentiating the risk of systemic institutions from other institutions, including community banks. We note the Comptroller of the Currency will sign the final rule next week and the FDIC Board will take up an interim final rule at its board meeting on July 9.

"We believe the solutions crafted for residential real estate loans, accumulated other comprehensive income, and trust-preferred securities are significant and prudent changes. The solutions recognize the difference in how community banks operate and the relative risk they present to the financial system. As our then-chairman, Greg Gonzales (TN), testified before Congress:

"'For most banks, risk management is based on an inherent understanding of the underlying credit risk, a deep knowledge of its customer base, and an alignment between the success of the bank and its customers.' 

"While the framework approved today significantly reduces the complexity and the number of issues banks need to address, the rule still represents a significant change and burden for the industry.  The extended implementation period will be needed by the industry as they continue to recover from the financial crisis and adjust to the new rules.

"We were pleased to hear today the emphasis placed on the future proposals to enhance the capital standards for systemic firms, including a higher leverage ratio, a long-term debt requirement, and a capital surcharge.  We strongly encourage the federal agencies to expedite these efforts and to implement in a significant and meaningful way. These are critical measures to address “too big to fail” and ensure the modeling under the advanced approaches is constrained by significant amounts of loss-absorbing capital."


CSBS has been tracking and contributing to the public policy debate on the Basel capital rules for several years.

Most recently, Greg Gonzales, commissioner of the Tennessee Department of Financial Institutions and then-chairman of CSBS, authored an opinion piece published by the American Banker. In the piece, Gonzales acknowledged there is a solid case that the banking system and the stability of the economy would benefit from more capital. However, he raised concerns about how we achieve increased levels of capital. Gonzales indicated the federal agencies have the authority and ability to raise minimum capital in a direct and meaningful way.  For the bulk of our industry, this can be done outside of the Basel III process.

Gonzales also testified before Congress in November 2012 on the economic impact of the federal proposed rules implementing the Basel III capital accords and a Standardized Approach for risk-weighted assets. Gonzales told lawmakers the proposals were too complex, did not support economic recovery, and would inhibit banks’ ability to take prudent risk. He made it clear that state regulators support elevated and enhanced capital requirements, but said federal banking agencies should address these issues outside of the Basel III process and apply Basel III only to the largest internationally active banks, as intended by the international accord. Gonzales also raised concerns about the lack of sufficient understanding regarding the impact the proposals would have on the type of credit available, the manner in which banks lend, and the full impact on the economy and job growth.

CSBS submitted formal comment letters in response to the proposed Basel III and Standardized Approach proposals in October 2012. In the two letters, CSBS called for a more effective and less complex capital framework. In the Basel III comment letter, CSBS underscored the critical need of the federal 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. CSBS offered support for the agencies’ efforts to increase the minimum required capital, but recommended scaling back the scope of the proposed rule to apply only to institutions covered under Basel II, as indicated in the international agreement. 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 proposal would have on bank lending in traditional mortgage products, an overly complex framework, and a lack of empirical support for the proposed risk weights.

Also in October 2012, Commissioner Gonzales issued a public statement on the proposals. Gonzales offered support for higher levels of required minimum capital and an improvement to the overall quality of capital, but opposed the proposed approach put forth by the federal banking agencies to implement the Basel III capital accord and to incorporate a standardized approach for risk-weighted assets. Gonzales observed that most of the issues the agencies were trying to address in the proposals are best managed through risk management and the supervisory process. By proposing a capital rule that attempts to remedy various issues that occurred during the financial crisis on a transaction-by-transaction basis, the federal agencies would have built a capital framework that is more complex and more prone to volatility.