Senators concerned about possible economic fallout from capital requirements

Senators from both parties today expressed concern that the proposed Basel III endgame capital requirements would hurt small businesses, curb affordable housing efforts and drive banking activity to the nonbank sector. During a Senate Banking Committee oversight hearing of banking regulators, Federal Reserve Vice Chairman for Supervision Michael Barr was repeatedly asked about the justification for the proposed requirements and what analysis the Fed has conducted about its potential economic effects. Several committee members were skeptical about the need for the proposal, given its possible drawbacks.

The proposed standards would apply to banks with at least $100 billion in consolidated assets, which means they would apply to less than 40 of the nation’s more than 4,000 banks, Barr said. However, some committee Democrats said they have heard from constituents about its potential negative effects on housing and businesses. “From a small-business standpoint, if this rule doesn’t work, it’s going to raise hell with the economy in my state,” Sen. Jon Tester (D-Mont.) said.

Republicans were also critical, with Sen. Mike Rounds (R-S.D.) noting the rulemaking comes amid a slew of other proposed banking regulations on issues ranging from the Community Reinvestment Act to climate change. “We find it concerning you have failed to consider how these rules will impact banks and businesses of all sizes, ultimately harming the American people,” Rounds said. “As a direct result of these regulations and proposals, banks will now spend more time complying with Washington bureaucratic red tape instead of investing that time or resources into their local communities.”

Barr was pressed about the timing of a holistic review of the bank capital standards used to justify the proposal, noting that the review was released as part of the proposal. Barr also said that he is seeking “broad” consensus on from the Fed board in approving the standards rather than unanimous consent. “I want to reiterate that we are interested in public input,” he said. “We have recently announced an extension of the comment period [to Jan. 16, 2024]. With this extension, we are providing the public nearly six months to review the proposal, so they can provide meaningful comments.”