Financial experts warn Basel III rules threaten community banks

Bert Ely

Bert Ely, a financial institutions and monetary policy consultant, and Alec Pollock, a resident fellow at the American Enterprise Institute, said on Monday that Basel III capital rules threaten community banks.

“Community banks (defined here as financial institutions smaller than $1 billion in assets, which is less than one-tenth of one [percent] the size of megabank JPMorgan Chase) and the distinct feel they provide are currently being threatened by excessively complex Basel III capital requirements,” Ely and Pollock said, according to American Banker.

Basel III rules are reforms designed by the Basel Committee on Banking Supervision to reduce risk in the financial system and prevent a repeat of the recent financial crisis.

Many community banks have spoken out against the new capital standards, and banking barons Andrew Haldane of the Bank of England and Thomas Hoenig of the Federal Deposit Insurance Corp. have joined the institutions in opposing the rules, previous versions of which were in place before the financial crisis.

Haldane said that the Basel Committee only complicated the rules following the financial crisis, adding that under new Basel III rules, “a large bank might need to estimate several thousand…parameters,” American Banker reports.

Hoenig recently said that the Basel approach is “fundamentally flawed,” adding that regulators should reject Basel rules for a simplified system.

Ely and Pollock echoed that sentiment, saying that if regulators cannot completely reject Basel, a simple alternative would be an exemption for all community banks as is given to credit unions, according to American Banker.

Credit unions, the assets of which exceed $1 trillion, are exempt from Basel III rules, and Ely and Pollock maintain that if community banks are not exempt, regulators “cannot logically exempt credit unions.”

“If Basel III is applied to community banks, but not to credit unions, then it is not only conceptually and operationally cumbersome and burdensomely expensive, but it is self-contradictory as public policy,” Ely and Pollock said, American Banker reports. “…[T]he complexity of Basel III is irrelevant to 90 [percent] of U.S. banks, and should not be imposed on them.”

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