Bankers, Lawmakers Take Aim at Basel Rules

 By Alan Zibel 

WASHINGTON--Several banking and insurance executives on Thursday took aim at bank-capital standards being developed by U.S. regulators, amid bipartisan criticism about how the proposed rules could impact banks and the economy.

The so-called Basel III rules, designed to strengthen banks' ability to withstand financial turmoil, also came under fire at a hearing on Capitol Hill from lawmakers who are concerned about how they will affect community banks in their districts, and whether they will impede consumers' ability to get mortgages and other loans.

The proposal "may force out of business a lot of community and regional banks," said Rep. Carolyn Maloney (D., N.Y.) at a House subcommittee hearing.

Officials from Citigroup Inc. (C), Fifth Third Bancorp (FITB), State Farm Insurance Cos. and TIAA-CREF all took issue with aspects of how regulators proposed the U.S. version of the rules over the summer.

Daniel Poston, chief financial officer of Fifth Third, said the rules would generate too much complexity, even for mid-sized regional banks like his, which had more than $117 billion in assets as of September.

Mr. Poston said his bank takes similar risks to a smaller institution. "We are not complex or interconnected, and we do not have large trading or capital markets businesses," he said.

James Garnett, head of risk architecture for Citigroup, said that while tougher capital standards are necessary, they risk making loans less available. Likely to be affected are consumers with poor credit histories seeking home loans and small businesses, he said.

Meanwhile, some insurance companies that also own banks are also upset at the rules, arguing that they force insurers to comply with rules that are not designed for the insurance industry.

"Applying a banking framework to companies engaged in the business of insurance is fundamentally flawed," said Paul Smith, chief financial officer of State Farm, which owns a savings and loan.

The Basel III agreement being implemented by U.S. regulators requires banks to maintain a level of common equity equal to 4.5% of their assets, weighted for the risks that they pose, plus an additional 2.5% "capital conservation buffer," also of common equity. The total 7% common-equity cushion compares to current common-equity standards as low as roughly 2%.

Both Democrats and Republicans echoed the concerns of community banks, who are aggressively pressing for an exemption from some of the rules, arguing that they lack the resources to comply with some of their more complicated aspects.

The approach in the Basel proposal "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, (R., W.Va.) "There needs to be significant flexibility in the way these rules are finalized that properly takes into account the difference in their business models."

Regulators suggested that they might alter their proposal to accommodate some of the small banks' concerns, but didn't divulge details. "We are sensitive to the comments of community banks," said Michael Gibson, a Federal Reserve official charged with overseeing bank supervision.

Write to Alan Zibel at [e-mail]