Congress warned against negative impact of Basel III capital rules

Daniel Poston, the executive vice president and CFO at Fifth Third Bancorp, warned Congress last week that proposed Basel III capital rules could have a negative impact on American consumers, banks and the larger economy.

Under the proposed rules, certain home loans would require two to four times additional capital to back them up. Poston said the requirement could discourage lending, adding that banks would be forced to thoroughly review loan-to-value ratios to calculate risk, Business Courier reports.

“There is a very real cost in holding higher and higher levels of capital,” Poston said, according to Business Courier. “Most disruptive would be higher capital driven by onerous and complex risk-weighting rules that have not been demonstrated to be appropriate or accurate. Many banks will find that the only feasible alternatives are to shrink operations and reduce our service to our existing and potential customers. The result would be fewer mortgages, fewer commercial loans and less flexibility in reasonably pricing our deposit and loan products to our customers.”

Poston said that the regulatory burden imposed by the new rules “would pale in comparison to the impact on business activities and customer disruption,” reports.

Federal regulators are in the process of establishing the new capital rules determined by the Basel Committee on Banking Supervision under Basel III, an international accord between international regulators from more than 24 countries.

Poston said that the rules may force some lending away from traditional banks into the “shadow banking sector,” a market dominated by less regulated financial companies. Lending by non-banks is largely cited as a cause of the recent housing crisis, according to

Banking regulators have issued notice that they will postpone the Jan. 1 effective date of the rules as they further consider public and industry comments.

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