What is the Basel III endgame, and why are banks so nervous about it?

What is the Basel III endgame, and why are banks so nervous about it?


An unlikely coalition of banks, community groups and racial justice advocates are urging federal regulators to reconsider a plan they proposed in July to update rules governing how U.S. banks protect themselves against potential losses. Are.

Regulators are calling for an increase in the amount of capital – assets such as cash – that banks must hold in an emergency to avoid the need for taxpayer-funded bailouts like the 2008 financial crisis. Under the pressure of rising interest rates and losses from cryptocurrency businesses, the demise of three medium-sized banks and a fourth small bank last year reinforced regulators’ views that additional capital is necessary. Financial regulators around the world, including the European Union and the United Kingdom, are adopting similar standards.

Banks have long complained that holding too much capital forces them to be less competitive and restricts lending, which could hurt economic growth. What’s interesting about the latest proposal is that groups that don’t traditionally associate themselves with banks are joining in the criticism. These include pension funds, green energy groups and others concerned about the economic impact.

“It’s biblical dynamics: capital rushes in, banks scream,” said Isaac Boltanski, an analyst at brokerage firm BTIG. “But this time is a little different.”

On Tuesday, the last day of the months-long period when the public could provide feedback to regulators about the proposal, bank lobbyists mounted a renewed effort to quash it. While there is no sign that regulators will withdraw the proposal completely, a flood of complaints about it may force them to make major changes before it is finalized.

The Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency – the agencies that will set the final rules – want to synchronize U.S. standards with standards developed by the international Basel Committee on Banking Supervision. The committee does not have direct regulatory authority, but regulators follow its guidelines in the hope that agreeing on how much capital big banks around the world should hold will help avert a crisis.

The new capital rules will apply only to institutions with $100 billion or more in assets — including 37 holding companies of U.S. and foreign banks. Some rules are even more narrowly tailored for institutions so large that regulators consider them systemically important. Regulators and financial industry participants call these rules the “Basel III endgame” because they are the U.S. government’s attempt to implement the Basel Committee’s 2017 proposal, known as Basel III.

If some version of the proposed U.S. plan is completed this year, the rules would take effect in July 2025 and be fully operational by 2028.

Banks are concerned with holding excess capital over the long term to offset the risks arising from lending, business operations and other daily activities. They also oppose the latest 1,087-page plan. Industry efforts to defeat the proposal include websites like americanscantaffordit.com and stopbaselendgame.comA steady stream of research papers detailing the plan’s failures, influencing campaigns on Capitol Hill, and even threats to sue regulators.

On Tuesday, two lobbying groups, the American Bankers Association and the Bank Policy Institute, filed a comment letter more than 300 pages long, detailing how the proposed rules could boost lending activity in the shadow banking industry, reducing market liquidity. Can do and cause it. “A significant, permanent reduction in gross domestic product and employment.”

Banks are particularly angered by proposals to hedge the risks arising from mortgage lending. The option – this is one of a number of options set out in the scheme, but it has attracted the most attention – would force them to pay more attention to the characteristics of each loan and in some cases assign the loans a much higher risk score than currently. Will do.

They say this rule may cause them to stop lending to borrowers they do not consider safe enough. This could harm first-time homebuyers and those with stable banking relationships, including Black Americans, who regularly face racism from the banking business.

Banks also say the rules will make it harder for private companies to get loans, forcing banks to consider them riskier borrowers than public companies, which must disclose more financial information. Banks say that many private companies are as safe as, or safer than, some public companies, even though they do not have to meet the same financial reporting requirements.

Some? liberal democrat Dedicated in Congress and Nonprofits closing the racial wealth gap Concerned about the mortgage treatment of the scheme. Others say parts of the proposal could harm renewable energy development by removing tax benefits for funding green energy projects.

The National Community Reinvestment Coalition, which pushes banks to do more business in largely black and Hispanic neighborhoods, where banks often have less of a presence, warned that parts of the proposal would have “overly aggressive capital requirements.” “There is the potential to make mortgages significantly more expensive for low-wealth.” Population.”

Pension funds, which would count as private companies rather than public under parts of the proposal, say it would force banks to treat them unfairly. risky financial market participants Much more than they actually are.

There is no doubt that the regulators’ final proposal, if they issue one, will be different from the July proposal.

“We want to make sure that the rule supports a vibrant economy, that supports low- and middle-income communities, that it gets the right calibration on things like mortgages,” said Michael S. Barr, the Fed’s vice chair for supervision. he said. During a finance industry event in Washington on January 9. “The public comments we are getting on this are really important for us to get this done. “We take this very seriously.”

Most observers believe criticism of the plan will force regulators to make substantial changes. But not everyone agrees that the future is clearly bleak under the new rules. Americans for Financial Reform, a progressive policy group, argued in its comment paper, which praised the proposal overall, that research showed that banks Lend more – not less – When they had more reserve capital.

Still, Ian Katz, an analyst at Capital Alpha who covers bank regulation, said, “There are more complaints about this than there would normally be, from more groups.”

This may mean the banks are actually on to something this time, even if their warnings of economic pain sound familiar. But, Mr. Katz said, the future is less predictable than banks are predicting. While some may be held back from lending under tighter capital rules, others may see an opportunity to increase their market share in the absence of former competitors.

“We don’t know how individual companies will react to this as a final rule,” he said.



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