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VOL. 6 | NO. 18 | Saturday, April 27, 2013

Capital Requirement

Local bankers await new rules governing their money reserves

By Andy Meek

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In early April, U.S. Sen. Bob Corker, R-Tenn., joined a handful of other senators in drafting a letter in part about new rules of the road governing bank capital requirements.

U.S. Senate Banking Committee members Richard Shelby, R-Ala., left, and Bob Corker, R-Tenn., helped draft a letter in part about new rules of the road governing bank capital requirements. (Photo: AP Photo/Carolyn Kaster)

That letter was sent to Federal Reserve Gov. Daniel Tarullo, Comptroller of the Currency Thomas Curry and Federal Deposit Insurance Corp. Chairman Martin Gruenberg.

“We believe that we should not move forward with an overly complicated capital regime for smaller institutions,” Corker and the other senators wrote. “Community banks, for example, have very different business models than globally active financial institutions, and while there may be merit in improving the capital framework applicable to them, this should be a secondary priority to constraining leverage at the largest firms.

“The new Basel III capital standards were designed for large, internationally active banks, as was appropriate. We urge you to complete work on capital standards for the largest banks before turning to the smaller institutions. Then, devise a simpler framework that, unlike the current proposals, will be within the reach and capabilities of community institutions.”

The issue is on the front burner for several congressmen. U.S. Sen. Richard Shelby, R-Ala., is a member of the powerful Senate Banking Committee and has introduced legislation that would effectively slow down the implementation of new capital standards by requiring regulators to study the economic impact of those rules first.

Jim Bullard, president of the Federal Reserve Bank of St. Louis, spoke to the Economic Club of Memphis in the fall. He drew applause from the audience – composed in large part of bankers and financial industry professionals – by mentioning new bank capital standards in the same sentence as a reference to a prophesy about the end of the world.

His quip was about how new international bank capital standards are “actually mentioned in the Mayan calendar.”

Needless to say, it was a reflection of the fact that bankers at institutions of all sizes – in Memphis and beyond – are watching what develops with keen interest.

“We definitely need larger banks in this country, because somebody has to serve the banking needs of large, multinational corporations,” said Will Chase, president of Memphis-based Triumph Bank. “FedEx employs a few hundred thousand people around the globe. How do they make payroll on Friday? Money’s got to go out and sometimes in different currencies.

“For me, I think the idea of keeping more capital is on the surface a good idea. Except if you have proven results and good asset quality. That’s really what ought to drive it, rather than just the fact of you being a $400 million or $400 billion institution.”

In the wake of the financial crisis of 2008, it became en vogue for lawmakers to call for increasing capital reserves among banks so they’re better able to withstand losses. Regulators and lawmakers have grappled for the law few years with how to make that a reality.

To banking regulators, whose job it is to protect the banking system and ultimately consumer and business deposits, capital is king, says Kirk Bailey, president, chairman and CEO of Memphis-based Magna Bank.

“We believe there will eventually be risk-based capital standards that are more onerous for banks with more than $10 billion in assets, which tend to have more diverse fee-based lines of business than smaller banks,” Bailey said. “Some of the business lines of larger banks can have very volatile earnings, requiring more capital to protect the bank against hits to capital resulting from operating losses from the business lines. Smaller banks’ income historically has been driven by spread income, which tends to be less volatile and therefore typically doesn’t impact capital as dramatically as some fee-based lines of business.”

Smaller banks may still feel some impact, though. Robert Trimm, chief investment officer for Legacy Wealth Management, said he doesn’t think smaller banks will be immune to the effects of any new capital requirements.

“I would expect that the cost of raising capital for small banks would be higher than for large multinational banks, which given their size and reach would tend to have greater economies of scale,” Trimm said. “More helpful, I think, would be to apply the same capital requirements to government agencies such as the Federal National Mortgage Association and Federal Home Loan Association. This would help to reduce (their) competitive advantage and allow smaller banks the ability to better compete in local real estate markets, an area in which smaller banks should have an informational advantage.”

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