The Senate Banking Committee, chaired by Sen. Tim Johnson, D-S.D., held a hearing with three career-level banking regulators to consider the proposed Basel III international banking rules.

The proposed rules include strengthening capital requirements for banks to be in line with a mandate from the G-20 nations in the wake of the 2008 financial crisis.

The rules are supposed to reform the calculation of risk weightings, but as Sen. Bob Corker, R-Tenn., points out, sovereign debt continues to be considered risk free, in spite of the prolonged turmoil in the European Union that led to runs on U.S. money market funds. If sovereign debt actually defaults, the weighting would suddenly go from zero to 150 percent.

Corker said it is ironic that the same Treasury Department that touts the capital reforms has managed to get an exemption for its own securities.

A number of measures are proposed to strengthen capital requirements under both Basel III and the Dodd-Frank Act for the largest, riskiest banks, but these would not take full effect until 2019. The proposals were supposed to take effect on Jan. 1, but they will be delayed until some time next year while the regulators review the 1,500 comments they have received.

Much of the hearing was devoted to complaints by community and regional banks, which would be largely unaffected since they already meet the new standards, but this has not stopped them from complaining collateral effects, such as increased compliance costs that they claim make them susceptible to takeovers by larger banks.

Also, insurance companies continue to insist that their industry should be given special treatment, because their business plans call for longer-term investments than that of banks, and the bank regulators are required to consult with the insurance regulators.

Therefore, all of the regulations are sure to be watered down by the time they are adopted next year.

Some highly esoteric issues were raised by the industry during the comment period, but they deserve attention because of the implications they have for the solvency of the industry.

• Accumulated Other Comprehensive Income (AOCI). As explained by the Federal Reserve’s Michael Gibson, “The proposed treatment of AOCI would require unrealized gains and losses on available-for-sale securities to flow through to regulatory capital as opposed to the current treatment, which neutralizes such effects.”

Embedded in this verbiage are at least three forms of special treatment banks receive that make it difficult for investors to determine the true state of bank solvency — the ability to avoid marking these securities to market on an ongoing basis, the existence of a separate category of capital laden with special rules and the neutralization of capital charges. Among the industry’s complaints is that the new rules “could affect the composition of firms’ securities holdings.”

• Treatment of Commercial Real Estate Loans. Currently, all commercial real estate loans are given the same risk weighting, regardless of their risk. After a long history of periodic collapses in this market, the regulators are proposing to introduce risk sensitivity, and the industry is complaining. One of the effects of the rule would be to reduce the capital charges on safer commercial real estate assets.

• Trust Preferred Securities (TruPS). As defined by Investopedia, these instruments “have been created by companies for their favorable accounting treatments and flexibility. Specifically, these securities are taxed like debt obligations by the IRS while maintaining the appearance of equities in a company’s accounting statements as according to [generally accepted accounting principles].” The industry has balked at getting rid of this treatment and has sought lengthy delays in the abolition of this device.

The most pointed comment was made by Sen. Sherrod Brown, D-Ohio, who said, “I'm concerned that Basel III allows the largest banks to use complex internal models for CDOs [collateralized debt obligations], OTC [over-the-counter] derivatives, to game the system to make themselves look less risky than I think they are.”

In summary, the overriding question, and one that is bound to be debated for years, is whether anything has really changed in the regulation of banks.

In an interview at the Newseum, Rep. Barney Frank, D-Mass., argued once again that the policy of “Too Big To Fail” has actually ended, whereas critics are just as confident that the largest banks not only will be bailed out, but in fact continue to be bailed out on a daily basis and have continued to grow larger and more dominant.

Robert Feinberg served on the staff of the House Banking Committee for the 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms and trade associations.

Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.