Under pressure from industry groups, federal banking regulators have extended the comment period on Basel III risk-based capital proposals by six weeks to Oct. 22.

Banking regulators issued their capital proposals in June. At the time industry officials were surprised by the higher capital requirements overall, which included higher risk weightings for residential mortgages and other assets. FBR Capital Markets vice president Edward Mills called it a “double-whammy.”

Community banks expected the new Basel III RBC regime would be aimed at the largest banks.  But the Federal Reserve Board and other agencies did not provide an exemption for small institutions. 

“It appears the Fed is picking a fight with different industry participants,” Mills told National Mortgage News. He noted that opposition from the financial services industry is going to make it difficult for regulators to finalize the capital rules.   

As proposed, plain-vanilla conventional loans with loan-to-value ratios above 80% that currently have a 50% risk weight due to private mortgage insurance could end up with a 75% or 100% risk weighting.

The Basel III proposal does not recognize private mortgage insurance for purposes of calculating the LTV ratio and risk weightings. 

Balloon mortgages, interest-only loans and home equity loans would have risk weightings ranging from 100% and 200% depending on the LTV ratio. 

It would “penalize” smaller banks for holding these types of loans in portfolio, according to James Kendrick at the Independent Community Bankers of America

Also, it could “force a lot of banks to drastically slow down or stop” residential lending in their communities, the ICBA vice president said.

The ICBA and other trade groups are urging banking regulators to exempt community banks from the Basel III proposals so they can continue to operate under current capital rules.

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