Regulators Postpone Some Basel Rules

United States regulators said Friday they were postponing a significant part of the financial regulatory overhaul after banks said they would not 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 the Federal Deposit Insurance Corporation.

United States regulators are in agreement about most parts of the Basel overhaul, according to two people familiar with the process who spoke on condition of anonymity because the deliberations were not public. The main sticking point appears to be whether to exempt smaller banks from some of the rules. One senior official said the agencies were planning to postpone the rules only briefly.

Regulators may have initially been caught off guard by 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. “We are very pleased with the delay,” said Christopher Cole, senior regulatory counsel at the I.C.B.A. “We’re hoping we get an exemption.”

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 on Friday, a 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. For instance, they often make so-called balloon mortgages, which borrowers have to pay off after, say, seven years, or refinance. Ms. Duke noted, however, that community banks in fact had losses on residential 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. The Obama administration’s long-term aim is to reduce the amount of mortgages that the government guarantees. It wants to go back to a market where private banks and investors hold more mortgages. But banks may want to hold less if they are subject to the Basel rules. There’s a danger with making the rules too loose, though. That could prompt smaller banks to make 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.

In her speech, Ms. Duke appeared to acknowledge the risks. “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 finalized in June.

In addition, most large banks already have enough capital to meet the Basel capital requirements that come into effect on Jan. 1. However, they haven’t amassed all the capital that they will 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 the delay on Friday 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.