U.S. Regulators Urge Flexibility in Basel III Rules for Banks, Insurers

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U.S. lawmakers and state financial regulators on Thursday called on federal officials to revamp proposed rules that would force financial firms to hold much more capital, asking them to consider the impact on small banks and insurance companies.

U.S. bank regulators are writing rules to implement an international accord known as Basel III. The agreement is seen as one of the key reform efforts after the 2007-2009 financial crisis to make the global banking system more resilient.

Under the rules proposed by the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC), the biggest banks would have to hold the most capital.

But the rules could pose challenges for community banks and other firms who must meet stricter capital requirements, U.S. lawmakers and state bank and insurance regulators said during a House of Representatives committee hearing.

“The one-size-fits-all approach to regulatory capital in the proposed rules does not take into consideration the diversity of our nation’s financial system and the unique challenges faced by different-sized institutions,” said Rep. Shelley Moore Capito, a Republican who leads the House subcommittee focused on financial institutions.

“There needs to be significant flexibility in the way these rules are finalized that properly takes into account the differences in their business models,” she said.

Officials from the Fed, the FDIC and the OCC said they are taking industry criticism seriously and repeated assurances made at a Senate hearing earlier this month that they expect to make changes based on comment letters submitted by the industry.

Under the proposed rules, banks would have to hold about three times more basic capital to guard against potential losses. The amount of reserve capital banks would need to hold would be determined in part by the riskiness of their assets.

Most in the industry agree that firms need to hold more in reserve after many banks needed capital injections to survive the financial crisis. But many in the industry and in Congress have criticized the particulars of the U.S. rules.

Greg Gonzales, commissioner of the Tennessee Department of Financial Institutions, said the proposed rules are too complex and could hamper small banks’ lending to communities that are still struggling with the weak U.S. economic recovery.

“We need to encourage a supervisory process that prudently supports economic recovery, not policies that would further suppress the flow of credit or drive business from the regulated deposit system,” said Gonzales, who also serves as chairman of the Conference of State Bank Supervisors.

“We need to clearly understand how these proposals will change the type of credit available, the manner in which banks lend, and the full impact on economic recovery and job growth,” he said.

U.S. regulators have said they believe many banks already hold enough capital to meet the requirements but that they are sensitive to community banks’ concerns about the rules.

Kevin McCarty, commissioner of Florida’s Office of Insurance Regulation and president of the National Association of Insurance Commissioners, said insurance companies that also offer banking services could struggle to comply with rules that were developed with banks in mind.

He said the rules could conflict with existing state regulations for insurance companies.

Earlier this month, the federal banking agencies said banks would not have to comply with the Basel rules in January, as previously expected.

European Union sources have told Reuters that Europe is preparing to follow the United States in postponing the introduction of the Basel III reforms.

Michael Gibson, director of the Fed’s division of banking supervision, said he could not yet say when the final U.S. rules would be released.