ABA Urges Treasury, Regulators to Fix Capital Rule Problems

As part of the banking industry’s continuing response to President Trump’s executive order outlining “core principles” for financial regulation, the American Bankers Association provided recommendations to the Treasury Department today on areas where the bank capital framework can be improved.

Specifically, ABA recommended ending the penalty on banks for holding mortgage servicing assets, treating risk-free assets like cash and reserves at the Fed as truly risk-free, correcting the Basel capital disadvantage for Subchapter S banks, excluding unrealized gains and losses from capital calculations, following congressional intent on trust preferred securities and reducing unnecessary complexity in capital calculations.

ABA emphasized that holding adequate levels of capital is a “primordial view” of the bankers. Today, “capital regulation for U.S. banks is far more complex than need be to achieve that supervisory result,” the association added. “There is some tailoring of capital standards, but more can be done to make capital regulations better aligned with the risks presented by the variety of business models and activities of our diverse banking industry.”

As Treasury reviews the capital framework, ABA urged policymakers to focus on unique concerns related to community banks, reducing the number and complexity of calculations, recognizing the role of stress testing and incorporating appropriate risk sensitivity instead of relying solely on a leverage ratio.

The white paper is the second of several that ABA will submit to Treasury in response to the executive order. It reflects feedback and input from numerous banks participating in ABA’s capital working groups over recent years. For more information, contact ABA’s Wayne Abernathy.