Two more federal regulatory agencies this week approved an interim final Basel III rule that may leave a little breathing room for community banks, though feds did not allow smaller banks the total exemption many were hoping they would get.
While the rules proposed by the FDIC and OCC and adopted by the Fed last week will increase capital requirements on the very largest financial institutions, regulators cut community banks a break.
"Any relief is good relief," remarked Robert Mahoney, president and CEO of Belmont Savings Bank. "This regulation as it was originally coming down was just chaotic."
For many smaller banks, the big ticket item is relief on the residential mortgage front, where they’ll be allowed to continue using Basel I risk weights.
"For banks like ours, who do a lot of residential mortgages, if you start increasing those risk ratings, all of a sudden, it’s not much fun to do mortgages," Mahoney commented. "There’s already enough wind in our face on mortgage lending."
Under the proposed rule, bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody (covered BHCs) would be required to maintain a tier 1 capital leverage buffer of at least 2 percent above the minimum supplementary leverage ratio requirement of 3 percent, for a total of 5 percent.
Banks with less than $250 billion in assets will also be able to opt out of including accumulated other comprehensive income (AOCI) in regulatory capital.
Smaller banks will also be grandfathered in to include trust preferred securities in their tier 1 capital, an important item for the many mutual banks scattered about New England.
"I think having that disallowed was an unfair penalty, so that will be a real help to us as we try to build capital in conjunction with the overall initiatives," Michael Butler, president and CEO of First Trade Union Bank, said.
"We get a one-time opt-out for the market valuation changes in our investment portfolio, so our capital will not swing back and forth as interest rates begin to change," John Korona, president of Mansfield Bank, said. "For some community banks, that could be as much as a $1 to $2 million change in your portfolio over time."
But community banks won’t be exempt from all the rules.
"The direction the regulators are taking toward increased capital hasn’t changed," Butler said. "These are technical issues that will help us not to become overburdened. But we’re still preparing for increased capital requirements over the next three to four years."
