via email
November 3, 2003
Massachusetts
Bankers Association
Public
Information Room
Office of
the Comptroller of the Currency
250 E Street, SW
Washington, D.C. 20219
|
Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Attention: Comments/OES |
Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve
System
20th Street and Constitution Ave, NW
Washington, D.C. 20551 |
Regulation Comments
Chief Counsel's Office
Office of Thrift Supervision
1700 G. Street, N.W.
Washington, DC 20522 |
Subject: Risk-Based
Capital Guidelines; Implementation of New Basel Capital Accord
To Whom It May Concern:
On behalf of the Massachusetts Bankers
Association's 225 commercial, savings and co-operative
banks and federal savings members
located throughout Massachusetts and New England, we welcome the
opportunity to comment on the
Advance Notice of Proposed Rulemaking (ANPR) addressing the
implementation in the United States
of the new Basel Capital Accord (New Accord) being developed by
the Basel Committee.
The Association
supports the overall goal of Basel II, which is to create a measure of
capital adequacy that better links capital requirements to the risk
profile of large internationally active banks. The proposal
is radically different from the 1988 Capital Accord in that the risk
based capital requirements would no
longer be based on a few pre-set capital ratios but
rather, banks would be permitted to set their own
capital
requirements by using a sophisticated internal system of defining risk
estimates for each credit
exposure. The intended effect
would be to create risk sensitive minimum capital ratios and less
opportunity for regulatory capital arbitrage.
The ANPR proposes to mandate compliance for the top 10-12 large,
complex and internationally active institutions with total commercial
bank assets of $250 billion or more or total on-balance sheet
foreign exposure of $10 billion or more
(core banks). Other institutions (opt-in banks) can voluntarily
comply with the New Accord if they
can meet all of the eligibility standards. If the New Accord were
adopted in the United States, we would for the first time have a
bifurcated regulatory capital framework.
The Association would like to express our serious concerns with
respect to the competitive inequities
posed by the
proposed New Accord on our member banks, which for the most part are
regional and
community banks
with a strong market presence in retail, business, and residential
mortgage lending. The New Accord
also has negative implications for banks specializing in fee-based
lines of business, such as
investment servicing and investment management which do not have a
significant retail-banking
component.
The New Accord
has the potential to create competitive inequities for domestic core
banks competing
with opt-in banks;
domestic core banks competing with non-bank institutions for similar
products; and
domestic banks
competing globally with banks that have less restrictive regulatory
oversight.
Domestic Competition
The cost and complexity of opting in to the New
Accord does not make this a viable option for most
regional and community banks since only a limited number
of financial institutions will be able to make
the substantial investments in systems and
infrastructure needed to utilize the risk sensitive capital
framework.
While the ANPR would apply the Accord to the 10 largest institutions
in the country, it foresees that
the next 11
- 20 largest institutions could, for competitive reasons, voluntarily
choose to comply with the
Accord's requirements as well. Our major concern, however, is
the unintended consequences that
provide the top few banks a significant competitive advantage -
through lower capital requirements.
The New Accord could provide
significant capital savings for institutions that focus on mortgage
and other retail lending.
Banks that do not opt-in to the New Accord could end up holding higher
capital under the existing
capital requirements for similar products.
As FDIC Chairman Donald Powell testified in a Congressional Hearing,
"differences in minimum
regulatory
capital requirements for similar activities between the largest banks
and other banks could,
conceivably, affect
which banks make and hold loans and how they are priced." For example,
if a bank
can verify a lower risk weight and justify only 15-25 b.p. capital for
its residential mortgage portfolio,
there is no question that it will have
a major pricing advantage over its Basel I competitors retaining 400
b.p. capital for residential
loans. Our members may find it more difficult to compete for quality
assets.
Even more disconcerting is the potential "purchasing power" it
provides to institutions that can
deploy capital
more efficiently under the New Accord. The Association is concerned
that regional banks
and smaller
institutions which focus on residential lending may become acquisition
targets of Basel II
banks. For
example, a bank under Basel II would be able to bid for competitors
with sizeable retail
portfolios, and
even pay a premium to consummate the deal. This can occur because,
once the merger is
complete, the
acquired loan portfolio only requires 15-25 b.p. capital, in our
example, and not the 400 b.p.
required for the
recently acquired residential lending bank. While consolidation in the
banking industry is expected to
continue for the foreseeable future, the proposed New Accord cannot be
implemented in the U.S. without
eliminating the strong competitive presence of local regional and
community bank lenders.
Our
concern is not only for the regional and community banks that will
suffer but also for their customers
and the community they serve. If a Basel II bank wants to "own" a
market, the Accord provides
the tools to undermine any financial institution it chooses in any
community through either its
anti-competitive pricing advantage or by simply buying out the
competition.
We believe the New Accord to be inherently unfair in this regard and
would strongly urge the federal
banking agencies
to "re-think" this issue before implementing any aspect of the
proposal.
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Non-Bank Competition
The New Accord also raises competitive inequity issues among Basel II
banks and non-banks. U.S.
banks compete
directly with other non-bank financial institutions
(i.e.
investment management firms,
broker/dealers, insurance
companies, mutual funds, etc.) that are not covered by the proposed
"mandatory" capital requirements. While the New Accord may lead
to reduced credit risk capital
requirements for certain asset classes, institutions will be subject
to an explicit charge for operational risk.
Specialized investment banks without
retail operations will not benefit from the lower capital
requirements of credit risks to
offset the increased operational risk requirement. For such banks, the
operational risk requirement
in the New Accord creates an uneven playing field that can be
exploited by
non-bank competitors as
well as banks not subject to the Basel II requirements. Despite
efforts to create a
flexible approach to operational risk, the proposal is complicated and
untested.
International
Application
The New Accord raises
serious concerns for internationally active banks that compete globally
in jurisdictions that operate
in a less restrictive regulatory scheme. Regulators will have
considerable discretion in
how to apply the new rules in their respective countries. There is a
high potential that overseas
banks will have a competitive advantage over U.S. Basel II banks that
must adhere to a stricter
regulatory environment from an enforcement standpoint than their foreign
counterparts. In addition,
international banks operating in multiple jurisdictions may be
challenged to have a consistent method for
measuring risk and consistent
policies for the management of risk across the firm.
Conclusion
The New Accord should not be
implemented in the United States until there is a better understanding
of its ramifications in the
U.S. markets. It is not clear whether the incremental benefits of
lowering capital requirements will justify the increased cost. We
understand that U.S. banking supervisors are undertaking
an interagency pilot program that
will help to prepare for the implementation of Basel II. However, we
suggest that the regulators
also review and consider alternative approaches that do not represent
such a radical departure
from the existing regulatory capital framework.
While there may be a need to adjust
existing capital requirements, the proposed New Accord needs
significant modifications before
adoption in the U.S. Banks
have expressed that the New Accord proposes a highly complex,
onerous and costly approach to determining risk. For example, there are
80 separate requirements that must
be met in order for a bank to use the advanced internal ratings-based
approach to credit risk.
Separately, one of our members has commented that the rules do not
properly distinguish risk
profiles associated with the different roles a financial institution may
play in the securitization market.
The U.S. banking regulators should work with the industry to develop a
more streamlined and less
complicated approach to risk based capital. Additionally, the agencies
should remove the requirement
that an institution adopt the
internal ratings -based approach for credit risk and the advanced
measurement approach for operational risk at the same time.
On behalf of the membership of the Massachusetts Bankers Association, I
thank you for your
consideration of our views. In the meantime, please call me or Tanya
Duncan, Director of Federal and
Housing Policy, at the Association
office.
Sincerely,
Daniel J. Forte
President
Massachusetts Bankers Association, Inc.
73 Tremont Street, Suite 306
Boston, MA
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