Global regulators said Friday they are postponing a significant part of the financial regulatory overhaul after banks said they wouldn't be ready for the new rules.
The regulators proposed the rules in June, as part of an international effort to harmonize the global financial system. Smaller banks immediately objected to the proposals, saying they would be too costly and might deter them from making loans.
Some of the rules were supposed to take effect at the beginning of next year, but regulators have decided a delay makes sense. The rules stem from internationally agreed standards adopted by a body called the Basel Committee on Banking Supervision.
“In light of the volume of comments received and the wide range of views expressed during the comment period, the agencies do not expect that any of the proposed rules would become effective on January 1, 2013,†said a statement from the Federal Reserve, the Office of the Comptroller of the Currency and t he Federal Deposit Insurance Corporation.
Regulators may have initially been caught off guard the level of opposition to the Basel rules among smaller banks. Last month, an industry group called the Independent Community Bankers of America said that, “nearly 15,000 community bankers and their allies†had signed a petition against the rules. In particular, the community banks don't like Basel measures that would make banks hold bigger loss buffers, or capital, against mortgages.
In recent months, regulators have expressed sympathy for the concerns of smaller banks. In a speech Friday, Federal Reserve governor Elizabeth A. Duke suggested that smaller banks should have separate rules for mortgages.
The Basel rules demand more capital for mortgages with features that might make them less likely to get repaid. Community bank mortgages to individuals have some of those features. Even so, Ms. Duke noted that community banks had losses on such mortgages in the financial crisis that were far below those on subprime loans.
“I am convinced that the best course for policymakers would be to abandon efforts for a one-size-fits-all approach to mortgage lending,†she said.
But regulators face a real headache in deciding which banks should be subject to which mortgage rules. Too many exemptions could prompt smaller banks into making too many risky loans. While smaller banks may not have had huge problems with mortgages to individuals, many such firms collapsed under the weight of losses on loans made to borrowers who bought land and business properties.
Ms. Duke appeared to acknowledge the risks in her speech. “Crafting regulations to address the real problems that occurred in subprime lending without creating punitive burdens on community banks may prove to be quite difficult,†she said.
Notably, the delay announced Friday does not apply to the Basel rules on Wall Street trading operations that regulators f inalized in June.
In addition, most large banks already have enough capital to meet the Basel capital requirements that come into effect on January 1. However, they haven't amassed all the capital that they will ultimately need by the end of the Basel phase-in period, which extends till the end of 2018.
Some advocates of stronger regulation said they hoped Friday's delay wouldn't lead to exemptions for large banks.
“There are few things more important in financial reform than increasing capital at large banks,†said Dennis Kelleher, president of Better Markets, a group that has pressed for a tough financial system overhaul.
