By YOUNG MONEY Staff
30 October 2012

An Independent Community Bankers of America (ICBA) petition managed to gather almost 15,000 signatures from people asserting that community banks should not be compelled to adopt Basel III, and this widespread opposition could prevent mortgage and business lending from being curtailed.

According to an ICBA statement released on October 29, nearly 15,000 bankers signed a document asserting that these smaller lending institutions should be exempted from the Basel III requirements.

Mortgages and Commercial Loans

If these community banks have to adopt the regulations, the new rules could disproportionately impact lending activities related to the issuance of mortgages and also commercial loans. If implementing Basel III reduces the ability of these smaller lending institutions, it could hamper their efforts to both lend and invest in local communities. This constrained activity could help to further decelerate the current economic expansion.

Basel III Origins  

The document notes that the Basel III capital requirements were originally created by the Basel Committee in order to reduce the risk that major lending institutions presented to the entire banking system.

These large financial entities were implicated in the financial crisis and were labeled as systemic risks by many market experts due to the potential threats involved with their failure. It was noted that if one of these major banks became insolvent, such an event could spread to a wide range of other financial entities.

Community Banks

However, the petition noted that community banks were not implicated in the financial crisis. It also stated that these lending institutions have higher capital reserves than other types of banks. The ICBA document implores U.S. federal regulators to allow these smaller lending institutions to continue complying with the Basel I requirements, which are better-suited to the assets held by these banks.

The petition voices the opinion of the community banking industry as a whole, which states that the Basel III capital requirements will hinder the activities of these smaller lending institutions, ICBA president and chief executive officer Camden R. Fine said in the statement.

He added that "these proposed capital standards were designed to reduce the risks posed by the large and complex financial institutions that contributed to the worst financial crisis since the Great Depression," and that providing community banks with a regulatory regime that is too intricate will spur consolidation of these institutions and therefore limit the options that consumers and businesses have.