In a letter to the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corp., the ABA said that the “mutual is one of, if not the only, hometown bank in a community,” adding that Basel III rules “introduce a level of volatility that is contrary to a business plan that focuses on the long term.”
“Mutual institutions, like many of their community bank brethren, are sensitive to the risk of being caught short by the regulators and put in the harmful reputational box of being ‘undercapitalized,’” C. Dawn Causey, general counsel at the ABA, and Robert Davis, the executive vice president of mortgage markets, finance, management and public policy at the ABA, said. “Given the potentially severe supervisory consequences of holding too little capital, the only rational response will be to hold more capital than might ultimately be required…Mutual institutions often manage themselves well above the existing capital standards to provide a regulatory buffer because of their reliance on retained earnings.”
The ABA letter said that, while large banks have access to national credit markets to meet regulatory demands, mutual institutions are often unable to raise new capital due to their reliance on retained earnings.
“Using the mutual holding company structure, mutual institutions were able to access the national credit markets through the Trust Preferred market,” the ABA said. “However, that option is no longer available. What are left are retained earnings, a challenging option given higher operating expenses resulting from the Dodd-Frank Act and ongoing national economic stress.”
Additionally, the ABA said that if a mutual cannot increase earnings, there is “no choice but to shrink the bank,” which could hamper the institutions’ ability to lend to the community.
“And yet it would not result in safer and sounder operation and would fail to benefit the nation’s economic recovery,” the ABA said. “The Basel III proposals…would actually weaken the banking industry, make it harder to serve customers and inhibit economic recovery.”