The entire U.S. economy faces harms from the Basel III endgame. The public’s concerns warrant a data collection and analysis that goes beyond window dressing.
By Hugh Carney
ABA Viewpoint
As extensively documented by ABA, the Basel III endgame proposed by the banking agencies would have a profound impact on the availability and affordability of banking services. By ratcheting up capital requirements and imposing significant new costs, the endgame will harm not only banks but also small businesses, homebuyers, farmers, retirees and others who depend on access to credit and financial services.
It is no surprise, then, that the banking agencies have received comment letters from sectors of the economy that rarely weigh in on banking matters. Whether utility companies warning about higher utility bills or social equity groups warning about how the proposal would fuel inequality, commenters have recognized that the proposed standard holds significant and negative implications for the broader national economy.
Soon after the proposal was released last July, many began raising concerns that the proposal lacked transparent supporting data and analysis. In an apparent response to these concerns, Fed Vice Chairman for Supervision Michael Barr said earlier this year that regulators will collect and release an economic analysis of the proposal for public comment. While this is a welcome development, it is also evidence that the proposal itself was not developed with the data collected or analysis conducted — rather, the data and analysis are being produced after the fact to justify the proposal. Considering the thinness of the Federal Reserve’s prior “holistic review” of regulatory capital standards, it seems questionable that the regulators will do the real analysis that needs to be done.
Economy-wide warnings
The real issue with the Basel III endgame is not merely how it affects banks but how it will also damage the broader national economy. As a result, the banking agencies’ efforts to quantify the impact of Basel III should look beyond the banking sector. Specifically, the banking agencies should look to the concerns detailed in the numerous comment letters they have received as a guide and should collect data and analyze these concerns. They should examine whether implementing the proposed rule would:
- Raise the costs for farmers and food. The agricultural community warned that the proposal “will have a disproportionate impact on agricultural end users that are far outside the major financial centers, especially smaller entities such as grain elevators and family farms.”
- Constrict credit to small businesses. Thousands of small businesses have warned the proposal “will make it more expensive for banks to loan to small businesses.”
- Increase the cost of utilities. The National Public Gas Agency warned that increased costs “will most likely be directly passed on to public gas systems’ customers in the form of higher utility bills.”
- Hinder mortgage affordability, particularly for first time and minority homebuyers. Numerous housing and social justice groups have warned that “the changes would disproportionately disadvantage low- and moderate-income borrowers and communities, as well as Black and Hispanic borrowers.”
- Make it more expensive for banks to support green energy projects. Numerous commenters have warned that under the proposed tax equity treatment “billions of dollars in clean energy investments are at risk.”
- Obstruct new infrastructure. Builders have warned that “higher capital requirements would mean that access to much-needed funding would be limited for infrastructure projects and more costly.”
- Hurt retirement savings. Major public pension funds have warned that with the proposal “U.S. public pension funds will experience increased costs.”
- Make U.S. manufacturing uncompetitive. Manufacturers have warned of “significant adverse consequences for manufacturers of all sizes throughout the U.S.”
- Raise costs for state and local governments. The National Association of State Treasurers has warned of “increased borrowing costs and reduced liquidity and stability in the municipal debt market.”
- Disrupt insurance markets. A group of insurance providers warned that the proposal “would be arbitrarily punitive to the longstanding Mutual Insurer business model.”
How to make the analysis matter
As for the banking sector itself, regulators should particularly examine how Basel III endgame would make U.S. banks less competitive. All too often, the banking agencies have proposed standards that are more stringent than requirements in other advanced economies. Moreover, there is no recognition that U.S. banks already capitalize for operational risk, market risk and credit valuation adjustment risks in the annual Comprehensive Capital Analysis and Review stress testing framework. This significantly disadvantages not only U.S. banks, but the American corporations and consumers that rely on U.S. banks to purchase homes, plan for retirement, fund their businesses, and hedge their ongoing operating risks.
Regulators should also consider how smaller banks are affected. Several commenters, including the Conference for State Bank Supervisors, warned that the proposal will hurt the entire banking ecosystem, since smaller banks often work with larger banks to fund lending and mitigate risk.
The banking agencies should also examine how increased bank regulation has driven activities to nonbanks, where there are few consumer and investment protections and little transparency, including capital markets activities, derivative hedging and residential mortgages origination and refinances. Without the guardrails of the traditional banking sector, the nonbank sector has been growing rapidly and already poses a potential systemic risk, which the Basel III endgame would only exacerbate.
Finally, regulators should work to identify redundancies within the regulatory framework, detail the reasons why those redundancies exist, and work to eliminate them. The regulatory capital standards are incredibly complex, with scores of ratios, minimums and buffers — so complex that few truly understand them, their differences, how they interact with each other and their relevance. The endgame proposal will likely just add confusion as large banks will be applying two different standardized approaches, almost certainly resulting in significantly increased costs for banks and reduced access to credit.
The overwhelming public response to Basel III endgame shows that it would have far-reaching implications. As such, regulators’ attempt to study the rule’s impact should not be limited to banks. Ultimately, the findings of an expansive study would ensure that regulators are fully informed about the broader economic implications of Basel III endgame.
ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.
