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Basel Capital Standards

Issue

The U.S. banking regulators, in coordination with the banking regulators of other major financial countries, are in the process of implementing a new program of risk-based capital standards -- known as "Basel III" for banks.  These standards need to be closely tied to genuine risks and also need to be adjusted according to the wide range of size and complexity of banks in the United States so as to avoid creation of competitive inequities or inconsistent capital treatment for similar assets.

Position Statement

The capital strength of the American banking system allowed it to weather the recent financial turmoil better than non-banking financial businesses and better than less-well capitalized banks in other countries. ABA supports capital standards that adequately support the strength and risk profile of financial institutions. That requires a flexible regulatory program that properly aligns the capital program with the complexity and activity of the bank, such as through a menu of acceptable capital standards.

ABA will work for capital rules that are countercyclical, that do not worsen a credit crunch, and are appropriately related to reasonable measures of risk. The traditional banking industry entered the recent recession with the strongest capital position in history and as an industry maintained a strong capital condition throughout the crisis. Nevertheless, in the midst of the economic downturn further demands were made upon banks to increase capital ratios and to disallow traditional sources of capital.

Policymakers must not ignore the contractionary nature of increasing capital standards. New capital demands are already constraining the ability of banks to lend and will continue to do so; precisely at the time when banks would wish to meet the new credit needs of our customers and provide financing for economic recovery, regulatory demands are limiting our ability to lend. There should also be recognition that capital is not a cure all, nor a substitute for good underwriting and effective risk management. Moreover, policymakers must recognize that no amount of capital will be sustainable or adequate without strong earnings.

One example of legislative or regulatory action that could improve capital levels and capital access would be to allow S-Corporations to issue preferred stock without jeopardizing the S-Corporation election. This would increase the availability of capital to many community banks and increase their ability to provide loans and other financial services in their communities.

Additional Resources

​Contact for further information: Rob Strand (202) 663-5350.