The proposed Basel III endgame capital requirements could result in significant harm to the U.S. economy through its effects on U.S. businesses while failing to achieve the intended goals of improving safety and soundness and promoting financial stability, Federal Reserve Governor Michelle Bowman said today. Speaking at an event hosted by the U.S. Chamber of Commerce, Bowman said that despite her concerns, she saw a path forward for the proposal if it was revised to address what she viewed as its two greatest shortcomings: “over-calibration”—that is, establishing capital requirements far more stringent than what was recommended in the international Basel framework—and a lack of regulatory tailoring.
Bowman and Fed Governor Christopher Waller voted against moving forward with the rulemaking when it came before the Fed board last year. Bowman said much of the public feedback since then has been about its potential negative effects on a wide range of industries, including concerns from small business owners that it would make borrowing costs unaffordable and capital inaccessible. “These consequences could disproportionately harm underserved markets, businesses and communities as bank customers will bear the cost of these increased capital requirements,” she said.
Still, Bowman listed several changes that could be made to improve the proposal. For example, it should not penalize noninterest and fee-based income through the proposed operational risk requirements, she said. “I do not view these differences as insurmountable obstacles to achieving a more effective and efficient set of Basel capital reforms,” Bowman said. “Unlike many other areas of reform, the impact of changes to bank capital can be analyzed and understood, which provides a much better ability to compare and reconcile the tradeoffs of specific reforms.”