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Small U.S. banks eye risk-based capital standards
Industry News
 
By Kristin Roberts
ORLANDO, Fl, Oct 16 (Reuters) - A proposal from U.S. bank regulators to apply risk-based criteria to determine the amount of capital most American banks must hold does not go far enough in differentiating risks among assets, bankers said on Sunday. The proposal is for capital standards for smaller banks that do not come under the international accord known as Basle II.
Speaking on the sidelines of a banking conference, they said the proposal overlooked some types of assets and failed to make clear distinctions among some products, such as commercial loans. "It's not necessary to have a finite category for every asset, but to have more choices or get closer to the real risk of a given asset would be an enhancement," said Curtis Hage, chairman and chief executive officer of Home Federal Bank of Sioux City, South Dakota.

Bankers at the America's Community Bankers' conference said they would rather see detailed standards than a simple approach that could lead to overly conservative assessments that would require banks to hold more capital than they think necessary. International regulators agreed last year to the Basel II rules, which ultimately aim to prevent any financial crisis in one part of the world from spreading. The rules are meant to allow banks to cut borrowing costs for sturdy companies and raise them for risky clients.
But U.S. bank supervisors said a test of the new rules produced widely differing results and substantially lower capital requirements for some banks, raising concern that an undercapitalized bank might falter in the case of a shock loss or recession.
Banks not implementing Basel II also said the accord would give big banks an advantage by allowing them to hold less capital against certain assets. Earlier this month, the Federal Reserve and other bank officials said they would delay the capital accord as they update capital standards for smaller banks. They asked for comment on a proposal to create four new risk categories -- or buckets -- to determine how much capital a bank must hold against a given asset. The new buckets would increase the total number to nine.
Under the proposal, for example, mortgages would be split among the buckets based on various measures of risk. Kathleen Marinangel, chairman, president and CEO of McHenry Savings Bank in McHenry, Illinois, said more buckets could be useful.
Also, some assets are not addressed at all, such as fixed assets like a bank's building, she said. Under the standards, banks may be required to hold more capital against their buildings than they believe necessary, and that could deter banks from owning their facilities.
RISKS OF DELAY
Bankers at the conference, however, did say that the time it took to agree on the proposal could mean foreign banks could get ahead U.S. institutions in reducing capital requirements. "Even in my county ... I will have foreign banks that will be adopting Basel II more quickly and therefore they'll be able to deploy their capital more effectively. They'll be able to price their products lower in the marketplace to compete more effectively than we will be able to," said Marinangel.

Reuters 2005. All Rights Reserved.
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