Although Basel rules weren't intended for community banks, they are having a disproportionate effect on these hometown institutions. The American Bankers Association believes the Basel III capital deduction, which strongly encourages the divestiture of Trups, should be overturned.
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Basel III Pulls the Rug Out from Community Banks
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Under Basel III, any amount above 10% of a bank's common equity is treated as a loss and deducted from regulatory capital. The Basel III capital deduction strongly encourages the very divestiture of Trups collateralized debt obligations that was overturned in the 2014 interim final Volcker rule. As such, it is unclear how the Basel III treatment is consistent with congressional intent of retaining the "status quo" for the Trups market, as described by all three banking agencies. Is this deduction a means of reinstating the original Volcker Rule's divestiture requirement? The harsh capital treatment of Trups holdings under Basel III doesn't make a lot of sense. The purpose is to discourage banks from buying each other's capital instruments and thereby reduce interdependence among banks. However, going forward, banks will not be permitted to buy new Trups under Volcker.
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