Attorney says regulations could be tweaked for small banks

November 19. 2012 3:00AM

By Beth Fitzgerald

U.S. banking regulators have the power to exempt small community banks from the onerous new bank capital rules of Basel III if they chose, according to Michael Horn, a banking attorney partner with the Newark-based law firm McCarter & English.

Michael Horn says regulators vowed to 'never, ever, ever let this happen again' in the wake of the financial crisis. But Basel III rules could be tweaked for small banks to make their application more fair, he says.

Recent weeks have seen increased signs that the banking industry's objections to Basel III are being heard in Washington. Several federal banking regulators have proposed easing the impact of Basel III on community banks, and Congress may address the issue during the lame-duck session.

"Banking regulation goes in a pendulum," Horn said, and after the 2008 financial crisis, "the regulators said: 'We will never, ever, ever let this happen again.' " The result was the more stringent capital rules enshrined in Basel III, but "the irony is that it was the big banks that caused the crisis," but smaller banks are bearing the brunt of the regulatory effort.

Applying the Basel III capital rules to all banks, regardless of their size, creates a level playing field, but Horn said he doesn't think it would distort the banking market if Basel III rules were tweaked for small banks. He said many of the loans the small banks make "are too small for the big banks to even think about. I don't see any problem with having a two-tiered system, on the assumption that the current rules sufficiently provide for safety and soundness as it is."

Horn, who is chairman of the Federal Home Loan Bank of New York, which lends to banks, said if Basel III takes effect for the entire banking industry, "the trend of bank mergers will increase — and that is not a good thing."

U.S. banking regulators announced Nov. 9 that they would delay the implementation of Basel III, originally set to be rolled out in phases from 2013 to 2019, but did not announce a new timetable. In a statement, the regulators said they "take seriously our internationally agreed timing commitments regarding the implementation of Basel III, and are working as expeditiously as possible to complete the rulemaking process."

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