via e-mail
From: JOHN PRITSCHER
Sent: Monday, November 03, 2003 3:52 PM
To: regs.comments@occ.treas.gov;
regs.comments@federalreserve.gov;
Comments;
regs.comments@ots.treas.gov
Cc: Judy Kennedy
Subject: Comment on Basel Risk-Based
Capital Rules
November 3, 2003
TO:
Office of the Comptroller of the Currency
Att: Docket No. 03-14.
Ms. Jennifer J. Johnson, Secretary, Board of Governors of the Federal
Reserve System
Robert E. Feldman, Executive Secretary, Federal Deposit Insurance
Corporation
Regulations Comments, Chief Counsel’s Office, Office of Thrift
Supervision
Community Investment Corporation (CIC) appreciates the opportunity to
comment on the proposed Risk-Based Capital Rules, commonly known as the
Basel Proposals.
CIC is a large loan pool created by
Chicago’s banking community to make sure that multifamily rehabilitation
loans are readily accessible in the 6-county Chicago metro area. Fifty
banks share in every CIC loan, pooling risk, but our losses over the
last 19 years are actually lower than their conventional loans not
perceived as being in risky areas. Last year CIC did 131 loans for the
rehab of 2300 apartment units in low-rent areas, almost always below 50%
of Area Median Income; only one involved sale of tax credits.
Since CIC is a loan pool, selling
mortgage-backed notes to our investors on a quarterly basis, the
unintended consequences of the Basel Proposals would not directly hit
us. Nonetheless, they would have serious negative consequences on the
lower-income areas where our loans are concentrated.
Since the language in the letter from
Congressmen Frank, Kanjorski, Emanuel, Gutierrez et al. clearly makes
the points that we wish to support, we will quote from their letter:
It is our understanding that proposed regulations implementing the New
Basel Capital Accord seek to include public welfare investments made by
banks in compliance with the Community Reinvestment Act (CRA) in a
broader risk test for determining capital charges for higher-risk, non-CRA
investments. We are concerned that this may create a strong disincentive
for banks to make future CRA investments and greatly revitalization.
The notice of proposed rulemaking
published jointly by the financial regulatory agencies on August 4,
2003, appears inconsistent in applying the Basel II risk-based capital
requirements to CRA equity investments. One the one hand, the proposed
rule leaves unchanged the low capital requirements on most equity
investments made under CRA and other government supervised programs. The
rule specifically recognizes that CRA-related investments, including
investments in affordable housing and community development corporations
(CDCs), benefit from favorable tax treatment and investment subsidies
that make their “risk and return characteristics markedly different that
equity investments in general.” This approach accurately reflects, in
our view, the experience of CRA investments to date as having much lower
default rates and volatility of return than private equity investments.
The rule takes a contradictory approach,
however, in proposing to include CRA investments in a new “materiality”
test designed to assess risk exposure for banks’ higher risk equity
holdings. Under this test, when the bank’s total equity holdings,
including CRA investments, exceed 10 percent of Tier 1 plus Tier 2
capital, the bank must set aside substantially higher amounts of capital
for non-CRA investments. Given the fact that many large banks and
thrifts have sizeable investments in housing tax credits or CDCs that
may already approach 1- percent of total capital, the new materiality
standard will discourage future CRA investment to avoid triggering
higher capital charges on the banks’ other equity holdings.
It strikes us as inappropriate to use a
bank’s holdings of longer-term, low-risk CRA investments as a
significant factor for determining the amount of risk capital the bank
must maintain for more liquid, higher yielding and more volatile equity
holdings. If the proposed materiality test is adopted, it will clearly
discourage the largest banks that must comply with the new standard from
making substantial new CRA investments.
Since many other large banks and thrift
institutions also are expected to comply voluntarily with the new
standards, the result could be a substantial reduction in new CRA
investment and a potential loss of billions of dollars in future equity
investment in housing and community projects.
We do not believe the financial
regulatory agencies intended to discourage future investment in public
welfare investments nor create unnecessary conflicts between the Basel
II capital standards and the goals of the Community Reinvestment Act.
While we understand the materiality test is intended to implement
specific procedural requirements in the Part III of the Basel II
accord, we read the requirements as providing sufficient regulatory
flexibility to permit more effective procedures for measuring credit
exposure without discouraging CRA investment. We urge that appropriate
changes be made to the proposed rule to remove CRA-related investments
from the materiality test for determining capital requirements for other
bank equity holdings.
Sincerely,
JOHN PRITSCHER
President
Community Investment Corporation
cc: Judy Kennedy, National Association of
Affordable Housing Lenders | 
