ABA, BPI: Proposed capital standards pose significant costs to U.S. economy

The Basel III endgame capital proposal would impose significant costs on the U.S. economy, ranging from small business loans to the pricing of derivatives that allow businesses to hedge their risks, the American Bankers Association and the Bank Policy Institute said today in a joint letter to federal regulators.

ABA and BPI argued that the banking agencies dramatically underestimated the consequences of their proposal and failed to weigh the costs and benefits of their changes. Among its problems, the proposal includes an operational risk charge that would impose a tax on all banking activities at a level that massively overstates banks’ actual operational risk and fails to acknowledge that U.S. banks are already required to capitalize for operational risk through the stress tests, the associations said.

Additionally, it imposes unnecessarily high credit risk weights on mortgage loans, retail loans and small business loans that are unsupported by empirical analysis. It includes an outsized increase in market risk capital and fails to recognize the substantial overlap between the stress tests and the new framework for market risk. It also represents backdoor repeal of many of the capital tailoring provisions of the Economic Growth, Regulatory Relief and Consumer Protection Act, a bipartisan law passed by Congress in 2018.

ABA and BPI also said that agencies failed to adhere to the Administrative Procedure Act, which sets out requirements for all federal agency rulemaking. The proposed rule’s numerous legal weaknesses include a lack of justification and explanation, reliance on non-public analysis and a failure to fully consider the costs and benefits of the proposal, the associations said, adding that such flaws call for a full re-proposal of the rule.

Nichols: Basel proposal ‘unworkable’

The capital standards proposal is unworkable in its current form and needs to be withdrawn, ABA President and CEO Rob Nichols said. During a joint ABA/BPI press conference, Nichols highlighted three key problems with the proposal: Regulators failed to conduct a thorough and transparent data analysis to justify the rule change; it would restrict funding availability at a time when policymakers are working to avoid a recession; and it would ultimately threaten the ability of banks of all sizes to serve their customers, clients and communities.

“Regulators also say these changes are being driven by an international agreement, yet their foreign counterparts in other countries have chosen not to impose these higher capital requirements on their banks, putting U.S. institutions at a competitive disadvantage,” Nichols said. “These are outcomes no one should want and we can avoid them if regulators rethink this proposal.”

Nichols noted that regulators have stated repeatedly over the past several years that the banking sector is already strong and well-capitalized. He also noted that U.S. banks not only survived the economic challenges posed by the COVID-19 pandemic, but played a critical role in helping the U.S. economy emerge faster from that downturn than the rest of the world. “So the bottom line is we don’t see the justification for these kinds of capital increases,” he said.