JPMORGAN CHASE COMMUNITY DEVELOPMENT GROUP
November 6, 2003
Mr. John D. Hawke, Jr.
Office of the Comptroller of the Currency
250 E Street SW, Washington, DC 20219
Attention: Docket No. 03-14
Ms. Jennifer J. Johnson, Secretary,
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
Attention: Docket No. R-1154
Mr. Robert E. Feldman, Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Attention: Comments, FDIC
Regulation Comments
Chief Counsel's Office
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Attention: No. 2003-27
Dear Sir or Madam:
The JPMorgan Chase Community Development Group appreciates the
opportunity to comment on the proposed Basel II Capital Accords.
The JPMorgan Chase Community Development Group's mission is to
strengthen the communities in which we do business through expanding
access to capital and providing the resources of JPMorgan Chase. In this
endeavor we have historically provided significant financial support for
low- and moderate-income communities through investments in community
and economic development entities (CEDEs).
We are concerned about a potential unintended consequence of the
proposed Basel Accord rules that could adversely affect the amount of
equity capital invested in affordable housing, community and economic
development. The proposal appears to be in conflict with 12 CFR Part 24,
the regulation governing investments that are designed primarily to
promote the public welfare.
The vital role of these investments in the United States is clearly
recognized in part of the proposals. It is apparent that thoughtful
U.S.bank regulators, working with those of other nations, negotiated a
special rule for "Legislated Program Equity Exposures." This section
wisely preserves the current capital charge on most equity investments
made under legislated programs, "recognizing this more favorable
risk/return structure and the importance of these investments to
promoting public welfare goals." Insured depository institutions investing as a result of such
programs therefore would set aside, by and large, the same amount of
capital for CRA equity investments under the new rules as they do now ?
about $8.00 for every $100.00 of capital invested.
Given that CRA investments in affordable housing and community and
economic development all have a different risk/return profile than other
equity investments, the foregoing treatment is very appropriate. Based
on the considerable experience in the U.S. to date, CRA equity
investments may well provide lower yields than other equity investments.
They also have much lower default rates and volatility of returns than
other equity investments. For example, the public accounting firm of
Ernst & Young reported in 2002 that the incidence of foreclosure, the
single greatest risk to a tax credit investor, was only .14% on tax
credit properties over the period 1987-2000, and .01% on an annualized
basis. It is important that the final regulations make clear that
"investments in CEDEs" comprise all types of activities that are
eligible for bank investment under Part 24 as "Legislated Program Equity
Investments" that are held harmless from higher capital charges.
The "materiality" test of the proposed rules is of great concern. The
materiality test requires institutions that have, on average, more than
10 percent of their capital in ALL equity investments, to set aside much
higher amounts of capital on their non-CRA investments, such as venture
funds, equities and some convertible debt instruments. As drafted, this
calculation even includes CRA investments that are specifically held
harmless from the new capital charges. This has the effect of creating
unfair competition for space in the "materiality bucket between
investments in CEDES (CRA equity investments) and all other equity
investments." It causes unfair competition between CRA investments that
are equity investments, and those that are not (like
mortgage-backed-securities and loan pools).
Having to include CEDE equity investments, with their very different
risk/reward profile, in the proposed "materiality" bucket of more
liquid, higher-yielding, more volatile equity exposures will have an
unintended chilling effect on the flow of equity capital to those in
need. Some insured depository institutions that meet the credit needs of
their communities with substantial investments in affordable housing tax
credits and/or Community Development Financial Institutions, currently
approach or even exceed, the 10 percent cap from CRA-qualified
investments alone.
While the proposed rule would grandfather these institutions' current
levels of investment for 10 years, it would serve to raise a red flag
discouraging comparable levels of equity investment in low- and
moderate-income communities going forward. If the test is adopted as
proposed, it will put pressure on depository institutions to minimize
investments in low-yielding and less liquid CRA equity investments, to
avoid triggering the much higher capital charges on non-CRA equity
investments. These higher capital charges will double on publicly
traded equities, and triple or quadruple on non-publicly traded ones.
We understand that the rules will initially apply only to the biggest
banks. Yet we believe it is fair to say that regulators expect that most
other insured depository institutions will comply, sooner or later, and
some banks will voluntarily comply immediately, as a matter of best
practices. It makes no sense to set up a conflict between the
profitability of non-CRA equity investments, and the level of CRA-qualified
equity investments. The support of depository institutions for
affordable housing and community revitalization is well-established
public policy in the United States. Numerous, recent studies, including
those conducted by both the U.S. Treasury Department and the Federal
Reserve Board, document that programs supporting these goals have had
considerable positive impact on the nation's low- and moderate-income
communities, with little or no risk to investors.
Four solutions to the "materiality test" of the proposed rules are
suggested:
· First, it is important that the rule make clear that "investments
in CEDEs" comprise all types of activities that are eligible for bank
investment under Part 24 as "Legislated Program Equity Investments" that
are held harmless from higher capital charges.
· Second, the rules should exclude all CRA-related equity investments
that qualify under the Part 24 regulations from the materiality test
calculation.
· Third, the proposal that SBIC investments receive only a "Partial
Exclusion" from higher capital charges should not be expanded to include
any other CRA-related equity investments.
· Fourth, the ANPR proposes a "cliff effect" whereby if total equity
investments and/or SBIC investments exceed 10% of capital, then all of
the non-CRA and SBIC equity investments will require higher capital. We
suggest that only the additional equity investments above the 10% level
should require more capital.
These suggestions will avoid disrupting an important marketplace
serving accepted U.S. public policy goals. It will also preserve the
flexibility of depository institutions to respond to the credit needs of
their respective communities without regard to the form of that
response.
On behalf of the JPMorgan Chase Community Development Group, I urge
that appropriate changes be made to the proposed Basel Accord rule to
remove CRA-related investments from the materiality test for determining
capital requirements for other bank equity holdings. I appreciate this
opportunity to comment and would be pleased to provide additional
information of any form of assistance that will be useful in
deliberations on these rule proposals.
Sincerely,
Mark A. Willis
Executive Vice President
JPMorgan Chase Bank
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