We find ourselves in the middle of one of the greatest wealth transfer periods of all time. Those with wealth must decide whether they want to make transfers, and if they do, they must decide how much, to whom, when and in what structure?
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On one hand, the new rules known as Basel III from the Federal Reserve Board are more restrictive for all banks as they relate to investment tools such as municipal securities and municipal bonds, Boulder Valley bankers say. Such investments are the cornerstones of bank investment portfolios.
Bankers in Colorado still are trying to figure out what all the new Basel III rules may mean to them, including the capital requirements, said Jenifer Waller, a spokeswoman at the Colorado Bankers Association.
“There will be more restriction on what qualifies as capital, but at this point we are just beginning to dissect the 900-plus-page rule,” Waller said. “This is one of the more complicated rules to go into effect in my banking career. No one really has a handle on what it will mean for Colorado’s community banks.”
As a result of the new rules, all banks have to spend more time and money documenting their actions.
On the other hand, the new federal rules mostly are targeted at the largest banks in the nation, which in many ways helps level the playing field for community banks looking to compete for customers, area bankers say.
The new rules formally were announced July 2, in a more than 900-page document.
Basel III is so named because global banking supervision committee regulator talks are being held in Basel, Switzerland. Big banks will have to start following the new rules starting Jan. 1, while community banks with less than $10 billion in assets have until 2015 to comply.
The new rules were developed to respond to regulation problems that were revealed in a mortgage-loan-related financial crisis in the United States that started in 2008.
As a result of the new rules, banks generally are required to invest less money and instead keep 4.5 percent of capital on hand.
Flatirons Bank in Boulder has updated its policies and procedures to conform to the new rules, said its president, Kyle Heckman. Since most community banks, including Flatirons, invest half or more of their assets in government-backed securities, he said, they won’t have to move any investments around as a result of the new rules.
In general, such government-backed securities get paid back through sales-tax and property-tax revenue. Flatirons Bank holds mostly general-obligation bonds, mortgage-backed securities and a limited amount of corporate bonds, Heckman said. Flatirons Bank has two branches.
“Our portfolio is in government-guaranteed debt obligations, so for us, it was not a significant change of course,” Heckman said. “It hasn’t really changed our orientation, since we’re already in the safest category” of investment.
Larger banks such as New York-based JPMorgan Chase & Co. usually have wider ranges of investments, Heckman said, adding that they’ll be more affected by the new rules.
In addition, larger banks also tend to invest more capital in risk-based investments, said Mark Bower, chief financial officer of Home State Bank in Loveland, which includes Longmont and Lafayette locations among its 11 branches.
Asked about Basel III and the new rules on investment, two spokespeople for JP Morgan Chase referred the Business Report to the bank’s quarterly earnings report, issued July 12. The report did not address new rules on investment securities directly, other than to say that the bank’s securities investments were worth less in the first quarter in 2013 than they were the previous quarter because of higher interest rates.
In general, JP Morgan Chase in its earnings report that it would meet more new, stricter capital ratios in Basel III. JP Morgan Chase has 16 bank branches in Boulder and Broomfield counties.
Before the new rules went into place, large banks might invest more of their risk-based capital than a community bank would invest so they could maximize returns to shareholders, Bower said.
“The regulators have never let us get to the ratios that they were letting the big banks get to, so Basel III helps us in that regard,” Bower said.
Most community banks already meet the standards approved by Basel III, but they’ll have to pay more to deal with compliance issues, according to Tom Chesney, president of AMG National Trust Bank’s commercial banking division, based in its Boulder office. Chesney has estimated that AMG National Trust Bank may spend 4 percent of its annual budget on compliance issues.
“It’s a nonevent to community banks, but it’s a major event to the health of the financial system as a whole,” Chesney said.
As a whole, the new Basel III rules go a long way toward minimizing the potential negative impact that large banks could have on the economy in the future, he said. AMG has five branches in total, including the office in Boulder.
“It will help prevent a larger financial situation like the one that we just had,” Chesney said.
Summit Bank and Trust in Broomfield is well-capitalized and will remain so under the new rules, according to John Rhoades, president, in a written response to questions. Summit also is pleased that the administrative burden of complying with the new rules appears to be smaller for community banks and larger for larger banks, he said.
When it comes to investments, Summit does not anticipate it will need to change its current strategies, Rhoades said in the statement, without giving specifics. Summit has three branches.