Commissioner, Tennessee Department of Financial Institutions
The Conference of State Bank Supervisors supports higher levels of required minimum capital and an improvement to the overall quality of capital. We are strongly supportive of the Federal banking agencies’ efforts to improve capital standards internationally and for systemic institutions. However, we are opposed to 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. CSBS will be filing comment letters with the federal agencies expressing our concerns about the impact on the industry and the economy.
As bank supervisors, we believe there is sufficient justification for higher levels of capital. We can achieve this objective without increasing the complexity of capital. The proposed rules are highly reactionary to the most recent economic events and do not represent a thoughtful, long-term approach in the best interest of the U.S. banking system or the national economy.
Many of the issues the agencies are trying to address 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, we are building a capital framework that is more complex and more prone to volatility.
Many provisions of the proposed standardized approach are very similar to those proposed in the middle of the decade; however, the agencies have removed the beneficial aspects of those proposals and simply incorporated the more conservative elements. In response to previous proposals, we highlighted the need for further study on many of the risk weights and the potential impact on the industry. We continue to believe this is imperative.
The agencies have an obligation to provide empirical support for their recommended course of action, especially related to the risk-weights. We do not believe there is sufficient support for many of the specific risk-weights in the framework.
The standardized risk-weighted assets proposal would present key challenges for mortgage lending. At a time when the government lacks a long-term solution to housing finance, the proposed framework would further stifle mortgage lending by traditional depository institutions.
The definition for a Category I mortgage loan and the ability to achieve the more favorable risk weights is very narrow. This will likely cause banks to curtail or eliminate traditional adjustable rate products that banks have originated successfully for decades. The Category II risk weights are so punitive in nature banks will have a very difficult time extending loans secured by home equity. This is an important source of credit for consumers and small business. While the reasons for higher risk weights may seem obvious given the challenges we have experienced, we must remember that most banks conducted this business prudently.
In other areas, standardized risk weights are effectively serving to replace much needed supervisory judgment and institution specific analysis. For example, the proposal includes a new designation of “high volatility commercial real estate exposures.” The proposed approach, with a highly punitive risk weight, fails to adequately account for the institution’s experience and expertise in this type of lending, the adequacy of its policies and procedures, and the level of concentration. Issues with development and construction lending should be addressed at the risk management level and through the supervisory process. The proposed 150% risk weighting is effectively telling institutions not to engage in this type of lending.
State banking supervisors are supportive of high and strong capital standards in the United States. However, the framework must be clear and easy to implement and sustain. A strong and healthy banking system will fuel economic growth and promote job creation. An overly complex capital rule will only increase cost to the industry, curtail credit availability, and drive industry consolidation. This is not in the economic interest of the United States and it will be especially damaging to the economic prospects of local communities in Tennessee, as well as around the country.
CSBS will file comment letters on the Basel III and Standardized Approach proposals later this month. In the letters, we will ask the agencies to not advance the proposed rules and encourage them to seek out a more meaningful and less complex capital framework that promotes a strong banking system and provides a foundation for a healthy and growing economy throughout the United States.