If the U.S. were to "walk away" from Basel III, and go with the straight 15% capital-to-assets favored by Senators Brown and Vitter for our largest banks, it would stifle our largest financial companies' ability to compete internationally.

"If the U.S. were to require higher capital requirements for its banks, I guarantee that China and other countries will not do the same," says Rodriguez Valladares. "They will certainly have more capital to play with."

A Potential Negotiating Position for Community Banks

Frank Mayer -- a partner in the Financial Services Practice Group of Pepper Hamilton in the Philadelphia -- says that "the genesis of this is really the regional and community banks with total assets of below $50 billion, feeling that they should not be covered by Basel III."

"The theme is that the main street banks didn't cause the crisis that precipitated Dodd-Frank, that the global regime is more suited to SIFIs and GSIFIs Global SIFIs , and that the community banks are proportionally over-regulated," he says.

Nearly three years into the implementation of the bank reform legislation, community banks are going through a particularly tough period, with declining net interest margins, as rates stay near record-low levels, and regulatory compliance burdens, and expenses, increase.

"Dodd-Frank could certainly use some tweaking," according to Mayer, who adds that "certainly the regional and community banks might benefit from some exemptions."

Frank Sorrentino -- CEO of ConnectOne Bancorp of Englewood Cliffs, N.J., says community banks should not be subject to Basel III, and not because of the capital requirements, since most community banks already have sufficient capital levels to comply. "What is realy offensive is the amount of paperwork that has to be done to demonstrate compliance," he says.

Basel III "is going to cause a lot of expense" for community banks, according to Sorrentino, who adds that "expenses for banks actually cause capital deterioration," because banks will have lower retained earnings.

"It is a very counterintuitive measure when you look at community banks."

When discussing Dodd-Frank, Sorrentino says "the vast majority of the bill was designed around trying to eliminate a lot of the issues that led to the banking crisis, many of which the community banks didn't participate in. As we are seeing the law implemented, the playing field isn't necessarily fair in all aspects."

"Probably the answer lies in having higher cap requirements for larger institutions," he says.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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