Statement by Governor Elizabeth A. Duke

June 7, 2012

I will confine my opening remarks to the aspects of the rule that seem most applicable to community banks.

I want to begin by declaring my support for strong levels of high quality capital in banks of all sizes. The recent experience of the financial crisis demonstrated that the level and quality of a bank's capital was a primary factor in its ability to withstand adverse conditions and continue lending to households and businesses. This is just as true for small banks as it is for large ones. Not only will stronger capital add resilience to individual institutions, but all banks, including community banks, also benefit from the strengthening of the entire financial system. Aggregate additional capital held by all banks should reduce volatility in financial markets and collateral valuations.

Furthermore, under Dodd-Frank and in this proposal, larger banks using the advanced approach to determine their required capital will not be able to reduce their required capital to levels lower than those held by community banks. This would remove the concern, expressed by community banks about Basel II, that larger banks could gain a competitive pricing advantage through lower capital requirements for some banks.

I would like to applaud the staff for an exemplary effort that not only incorporates the provisions of Dodd-Frank and Basel III but that also restructures the capital rules into a harmonized, integrated regulatory framework. The product of this effort runs hundreds of pages so I want to especially thank and commend the staff for the breakthrough practice of including a shorter summary of the provisions that apply to community banks. The summaries, which are included as addenda to the two proposals that would affect community banks, reduce the required reading to a much more manageable 34 pages.

And I would note that each of the summaries contains references back to sections of the full rule for those who want to drill down further into the details. I think this is an especially valuable innovation for regulatory proposals. It is very important that we hear comments from banks of all sizes. Yet I know from personal experience how daunting it is to wade through hundreds of pages of sometimes complicated provisions to try to understand which provisions are applicable to a small community bank. Perhaps by offering the summaries we will receive more specific comments from community banks and comments from banks that would otherwise be deterred by the sheer volume of the proposals.

I really like the summaries and think they might be helpful beyond their usefulness for community banks. But since they are included as an addendum, they don't appear until late in the documents. I confess I don't know the issues you face in the legal framework, but I hope we will continue to use summaries in future rulemakings and find a way to alert readers very early in the document about the existence and location of the summaries.

Finally, I would like to stress the importance of understanding the trade-offs between the costs of significant changes to bank accounting and reporting systems and the benefits of more granular calibration of risk. Some parts of these proposals seem to me likely to require significant reprogramming by smaller banks. Before we impose such burdens, it is important that we understand the costs involved with each data element and weigh it against the expected improvement in the resiliency of the financial system. So I will be especially interested in commentary on the operational burden these rules might impose.