Basel III in its current form could force a harsh new reality on community banks. Basel III regulation would combine banks across the globe into one ‘too big to fail’ category. This is bad news for the community bank business model, so to combat the negative effects they sending a message to DC: Keep an eye on providing relief to the smaller banks while you reinforce bank capital requirements. From recent discussions in DC, this message seems to be gaining support in Congress.
Since the June 12th proposal requiring all banks to hold higher capital levels, and the re-determination of risk-weighting certain assets, exemption for community banks is being driven home through varied support. Big Congressional hitters such as Sen. James Inhofe (R-OK), Rep. Jared Polis (D-CO), Sen. John Boozman (R-AR), and Sen. Tom Coburn (R-OK) have dug up a range of topics that could hurt community bank loan portfolios, including:
- Restrictive capital requirements
- How rising interest rates will affect available capital
- The negative effects of increased risk-weighting
Opening this Basel III narrative on the impact for community banks is essential because of the need for continued economic improvement. The restrictions currently proposed not only reduce the available capital to lend and negatively impacting the communities, but also further strain an already stressed out local economy. Perhaps the key for Washington DC will be setting flexible standards within Basel III that grow with the smaller banks as they grow. Let’s hope the vested interest in keeping community banks solvent will prompt the necessary change, because in the case of Basel III one size truly does not fit all.