WASHINGTON — Community banks, once again solidly profitable and with capital ratios often better than larger banks, should not end up at a disadvantage as new rules are developed, Federal Reserve Gov. Sarah Bloom Raskin said Thursday.
"While we attempt to craft a risk-based system that makes sense from the perspective of safety and soundness, we have to resist the temptation to believe we can create a perfectly sensitive risk-based regime that gives the illusion of safety" for the banking system," Raskin said in remarks prepared for community bankers in Columbus.
She was referring to the Basel III final rules still under development as a framework for banking regulation going forward, rules that she said will have "meaningful modifications."
Rules that set capital ratios will involve "rough and imperfect estimates," she said. The Fed may decide, whatever the capital ratios, that "based on a bank's expertise in managing the risks" there may have to be "capital levels that differ from these minimum ratios."
Community banks, she said, for the most part "did not engage in subprime lending nor did they otherwise contribute to the financial crisis." Research shows "these banks provided public benefits in the crisis and in the recovery."
"Whether we single them out for special advantage is a question for legitimate debate," she said. "We I do know is that what we most certainly should not do is hinder them from engaging in a fair fight" with their larger competitors.
The forthcoming Basel III regime "would not be a meaningful surrogate for effective on-site supervision, and the effort to try to create an ever-more refined system would distract us from some of the important policy questions that lie ahead for our financial system," she said.
"There are costs to complexity that should not be ignored," she continued. "We shouldn't be lulled into thinking that these unnecessary costs should be allocated to community banks, which are a segment of our financial system that provides meaningful benefits to many Americans."
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