“During the 2008 financial crisis, the bulk of the government’s $700 billion Troubled Asset Relief Program went to aid larger institutions, leaving many smaller banks vulnerable.”
– Nobel Prize-winning economist Joseph Stiglitz, speaking to PBS Frontline this year
On June 7, the Federal Reserve surprised the banking community by voting for a proposal that would force even the smallest lenders to comply with the extensive international bank-capital rules commonly known as Basel III. Basel III is a global regulatory standard on bank-capital adequacy, stress testing and market- liquidity risk.
The Fed’s proposed rule would apply to all 7,307 U.S. banks. Its requirement for additional equity, intended to protect banks against losses, would mean the 19 largest US banks would need to add $50 billion and small and mid-sized banks would need to add $10 billion, all by 2019, according to Fed forecasts.
The burden on small banks (those with assets below $ 1 billion) is particularly heavy, because they would need to triple their common equity to 7 percent of their “risk-adjusted” assets.
Most bankers assumed federal regulators would exempt small and mid-sized lenders from Basel III. Indeed, the Fed initially focused on “too big to fail” banks whose troubles ignited the financial crisis that began in 2007.
Congressman Don Manzullo, R-Ill., said “the Fed’s new proposed rules will harm small banks’ ability to lend money to small employers that create the majority of jobs in America.”
Karen Shaw-Petrou, managing partner of consultant Federal Financial Analytics Inc., said: “Setting the bank-size bar so low will mean a real wake-up call for small banks. Many smaller banks will be forced to confront yet another challenge to an already fragile business model.”
The small banks, sometimes called community banks, would likely face “operational burdens” in implementing the rules, Fed governor Elizabeth Duke said.
Banks in this category have been in retreat for decades, suffering from anemic growth and new rules that curb fees.
Their share of industry assets fell from 31 percent to 10 percent since 1992, the Federal Deposit Insurance Corp. reported. Banks with $10 billion or more of assets controlled 72 percent of the nation’s bank deposits as of June 30, the FDIC said.
Big global banks such as JPMorgan Chase, HSBC and Citigroup have benefitted because they can afford to invest in cost-cutting technology.
Chris Cole of the Independent Community Bankers of America warned that “new mortgage guidelines that are also part of Basel III, would ultimately fall on consumers. … Community banks will just get out of mortgages completely.”
Fed chairman Ben Bernanke defended the Fed’s actions. “With these proposed revisions to our capital rules, banking organizations’ capital requirements should better reflect their risk profiles, improving the resilience of the U.S. banking system in times of stress, thus contributing to the overall health of the U.S. economy.”
Not everyone agrees that the Fed’s actions are in the best interests of the economy.
Stiglitz said the problems of small banks have already had negative repercussions. “By focusing on the big banks and not on the little ones, hundreds of these little banks have gone bankrupt. Hundreds more are in a precarious position. Lending is constrained, and inevitably that’s going to impair the recovery of the American economy.”
The Fed’s decision starts a 90-day comment period during which banks of all sizes are likely to pressure regulators to change the details of the proposal.
The Fed’s proposed actions would only contribute to public anger over the bailout of banks deemed to be too big to fail. Applying Basel III to all banks will result in further consolidation of our banking industry.
Originally published in the Sarasota Herald-Tribune
