Community banks enlist Congress to pressure regulators on new capital rules

Community banks are employing a powerful weapon to pressure regulators writing new regulations — Congress.

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In a hotly divided Washington, the banks have managed to get lawmakers of all political stripes behind a unified message: provide relief to small community institutions when it comes to implementing an international agreement to bolster bank capital requirements.

“Congress is firing a shot over the bow … get it right, regulators, is the message,” said Paul Merski, executive vice president for congressional relations for the Independent Community Bankers of America. “We have the sympathetic ear of lawmakers.”

The push comes as regulators are trying to write rules to implement the accord known as Basel III. The push to strengthen bank reserves in the wake of the financial crisis has been resisted by banks of all sizes, who warn it could handcuff them and restrict credit.

While big banks remain popular punching bags on Capitol Hill, community banks have won particular buy-in from Congress in their push to avoid the new regulations. 

Smaller banks contend that the beefed-up requirements are really intended for the world’s biggest financial institutions, since they actually pose a threat to the global system. They have found plenty of lawmakers willing to back them up.

The latest example of that effort came Thursday, as senators drafted hundreds of amendments for the Senate Democrats’ budget. One, from Sen. James Inhofe (R-Okla.), would direct regulators to exempt community banks from the new requirements. While nonbinding, the amendment underlines the continuing pressure Congress is bringing to bear on behalf of community banks.

“My amendment aims to protect small banks from being further subjected to the onerous regulations written for larger institutions,” Inhofe said. “Protecting the small community bank in turn protects American consumers from skyrocketing fees, too-big-to-fail institutions, and future bailouts.”

The Inhofe amendment is just the latest in what has been a months-long campaign by lawmakers to push regulators to ease requirements for smaller banks in their home districts. A similar amendment from Sen. John Boozman (R-Ark.) called for an examination of the regulatory burdens imposed on community banks.

Regulators have been inundated with comments on their proposed rules, including hundreds from banks across the country. But buried among the thousands of comments they have received are several dozen from lawmakers in both parties. The message in those letters is strikingly consistent: steer clear of community banks.

“We are concerned that regulations developed by the international community for the global banking system are being imposed on financial institutions of all sizes, including small community banks,” said one letter sent by the Oklahoma delegation, including two of Congress’s most conservative members, Inhofe and Sen. Tom Coburn.

“We write to express our concerns regarding certain aspects of the proposed Basel III capital standards and their potential effect on financial institutions that serve Colorado, particularly smaller community banks,” said another from the Colorado delegation, including Rep. Jared Polis (D), one of Congress’s most liberal members.

The entire state delegations of Wisconsin, Virginia, Georgia, Mississippi, and Iowa have been among others to press regulators on the matter.

While lawmakers are making their feelings known to regulators on the banking accord, there has not yet been a major push to address the issue legislatively. Rather, it seems lawmakers are waiting to see how U.S. regulators will finalize the rules before considering further action.

“Where Basel III is at in the process, it’s a regulatory issue,” said Merski.

Banking companies were originally supposed to fall in line with the accord on Jan. 1, but banking regulators announced in November that implementation was being delayed indefinitely, adding that rulewriters are working “as expeditiously as possible” to complete the job.