ABA State Association Letter to Regulators on Basel III Implementation

Ladies and Gentlemen:

The undersigned bankers associations write to express our deep concerns with your agencies’ proposed implementation of the “Basel III Endgame” capital regulations (Proposal). Our members firmly believe in a well-capitalized and innovative banking industry as a critical component of a strong national economy and a key support for the communities they serve. Rather than enhancing our members’ ability to serve their customers and communities, however, we believe the Proposal would constrain the banking sector’s ability to provide credit and other essential financial services. Our review of the Proposal, and the widespread concerns that others have raised, convince us that your agencies have insufficiently assessed and considered the potential economic damage to bank customers and the economy as a whole.

In particular, we share the concerns that the agencies rely on seriously insufficient supporting data and analysis to justify the significant increase in regulatory capital the Proposal would require and the resulting constraint on lending. Moreover, the agencies have failed to disclose those data to the public as part of the legally required process of notice and comment. Soon after the Proposal was released, a broad representative coalition of the industry raised detailed concerns about this lack of transparent supporting data and analysis.These concerns highlight the need to withdraw the Proposal and repropose a version with appropriate and transparent support.

Furthermore, in discussions among our members and their customers and other end-users of credit, it has become clear that the Proposal will likely restrict funding availability in a number of key parts of the economy:

• Residential mortgages – proposed increases in risk weights for mortgages with higher loan-to-value ratios will have a disproportionately harsh impact on low- and moderate-income borrowers and first-time homebuyers.
• Capital projects – increased capital requirements for legislatively mandated or favored programs, such as tax equity investments in green energy and low-income housing.
• Credit for small- and medium-sized businesses – unsupported higher proposed risk weights for businesses that are not publicly traded, compared to those for public companies, will put privately held customers at an unreasonable disadvantage.
• Hedging instruments – increased capital requirements for derivatives and other hedging instruments will raise costs and risks for a variety of businesses that manage risks through hedging, from airlines to farmers and other agribusinesses.
• Broad impact of operational risk capital charges – in addition to the risk weight changes already noted, a proposed capital framework for operational risk will raise capital requirements, and therefore costs passed through to customers, across the entire spectrum of ordinary banking activities.

These and other concerns were noted in bipartisan questions raised in November’s oversight hearings before the Senate Banking Committee and House Financial Services Committee.