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via email
October 27, 2003
Scott M. Polakoff
DSC Regional Manager
Federal Deposit Insurance Corporation
500 West Monroe Street, Suite 3500
Chicago, IL 60661-0002
Dear Mr. Polakoff,
As you may be aware, the proposal for the
Basel II Accord (internal model for determining capital requirements)
has a comment period that ends on November 3rd.
I am writing to you as CEO/President of
McHenry Savings Bank in McHenry, Illinois. I have been working to inform
the regulators, banking trade groups, the Basel committee, the Treasury
and others of the importance of this pending proposal to community
banks.
My messages continue to be:
- COMMUNITY BANKS MUST BE
ALLOWED TO "OPT-IN" TO THE NEW
PROPOSED BASEL H ACCORD, AND
- IN ADDITION, THE BASEL I
ACCORD AS ADOPTED IN 1988 MUST BE
REVISED TO MORE TRULY REFLECT ASSET RISK FOR THOSE INSTITUTIONS
THAT CHOOSE NOT TO "OPT-IN" TO BASEL II.
While talking to industry
representatives, I have found that there exists a misconception that
community banks do not want to be forced to adopt the Basel 11 Accord as
proposed. Please help get the message out that it is critical that we be
allowed to "opt-in" to this new proposal. The New Accord is trying to
more closely link minimum capital requirements with an institution's
risk profile. Community banks must retain the option to leverage their
capital, regardless of the complexity of the calculations to prove their
risk-worthiness. Small institutions will be at a competitive
disadvantage to the extent that they cannot deploy capital as
efficiently as larger, more sophisticated institutions.
As an alternate approach, I have prepared
a revised "risk-based capital formula" as enclosed. I have added more
buckets and have broken down assets into multiple buckets when taking
into consideration collateral values and loan-to-value ratios. These
values can be obtained through third party appraisal services or
published listings such as Black Book. This proposed formula is provided
to open up dialogue on potential revisions. I believe that it more
accurately reflects the true risk of assets on our balance sheets.
If capital requirements are changed and
new options are developed, institutions should be allowed to choose
between developing their own internal risk rating systems or maintaining
a modified risk-based system with more buckets and division of assets to
quantify risk more appropriately.
Thank you for your consideration of my
views of the Basel I and proposed Basel II Accord. I believe there is
much interest in the community banking industry for change.
Feel free to call me if you would like to
discuss this issue further.
Sincerely
Kathleen E.
Marinangel
CEO/President
McHenry Savings Bank
McHenry, IL
Risk-Based Capital
(Basel)
Proposed Components and
Formula
Supplemental
Information
A. The new proposed Basel II Capital
Accord internal risk based system will create competitive inequities if
smaller institutions are not allowed to "opt-in". Community banks are
capable of utilizing their internal resources to adopt the new system.
Additionally, outside vendors would most likely develop systems that
could be purchased by Community Banks to assist in the process.
Community banks MUST be allowed to "opt-in".
B. As an alternative to adopting
the Basel II Capital Accord, the current 1988 Basel I Capital Accord
risk-based formula needs to be modified to better reflect the true risk
associated with the assets held by financial institutions. This can be
accomplished by including more buckets and using collateral values for a
finer breakdown of assets based on valuations completed by outside
services. This may be done by taking into consideration collateral
values and loan-to-value ratios. A new Basel (1.5) could be developed.
C. A sample of the proposed formula is
attached. This formula would more closely link minimum capital
requirements with an institution's true risk profile.
1) The asset breakdown recommendations
presented have a common factor in that all of the listed assets are
collateralized. The collateral can be valued through outside appraisal
services or published listings (such as the Black Book).
2) More asset buckets have been
developed for the proposed Basel changes.
3) Specific assets have been subdivided
into tiers based upon loan-tovalue considerations to better reflect
the true risk of the assets.
4) Bank buildings and bank land have
been valued based upon appraisals. One-half of the appraised value has
been placed in the 20% bucket, which is conservative.
PROPOSED RISK-BASED
CAPITAL FORMULA
(* INDICATES NEW CATEGORY)
0% Risk Weight Category
Cash on Hand
U.S. Treasuries
*Interest-Earning Deposits (CD's) <
$100,000
20% Risk Weight Category
Cash Items
Correspondent Banks
Fed Funds Sold
FHLB Stock
General Obligation Municipal Investments
Loans Secured By Deposits
Money Market Fund Investments
Municipal Loans
U.S. Agencies
U.S. Agency-Issued MBS's
* Interest-Earning Deposits (CD's) >
$100,000
* 1-4 Family First Mortgages with LTV
Ratio < 60%
* HE Loans & HELOC's (including 1s( Mtg) with LTV Ratio < 60%
*Commercial Mortgages with LTV Ratio < 20%
*Consumer Loans with LTV Ratio
< 25%
* Bank Land & Premises - 50% of Appraisal
Value
40% Risk Weight Category
* 1-4 Family First Mortgages with LTV
Ratio > 60% and < 75%
* HE Loans & HELOC's (including 1st Mtg)
with LTV Ratio > 60% and 175%
* Commercial Mortgages with LTV Ratio <
40%
50% Risk Weight Category
* Other Qualifying Junior Liens
Private-Issue MBS's
Qualifying Construction Loans
Revenue Bond Municipal Investments
*1-4 Family First Mortgages with LTV Ratio
> 75'/.
*HE Loans & HELOC's (including 1st Mtg)
with LTV Ratio > 75%
*Commercial Mortgages with LTV Ratio < 50%
*Consumer Loans with LTV Ratio > 25% and <
60%
*Commercial Loans with LTV Ratio < 40%
60% Risk Weight Category
*Commercial Mortgages with LTV Ratio <_
80%
80% Risk Weight Category
*Commercial Mortgages with LTV Ratio < 80%
100% Risk Weight Category
Allowance for Loan & Lease Losses
Corporate Bond Investments
Loans Past Due 90+ Days
All Other Assets
*Commercial Mortgages with LTV Ratio > 80%
*Consumer Loans with LTV Ratio > 60%.
*Commercial Loans with LTV Ratio >
40%
* Bank Land & Premises - 50% of Appraisal
Value
* Unsecured Loans
Off-Balance Sheet items (20% Risk Weight)
Letters of Credit (Cash Collateral)
Letters of Credit (Other Collateral)
Total Adjusted Assets
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