The proposed Basel III endgame capital requirements are likely to have a negative effect on GDP and lead to reduced borrowing and higher lending costs, according to a new analysis of the proposal by PricewaterhouseCoopers. The firm assessed the proposal in its current form, although it noted that regulators have suggested that “broad and material” changes will be made before the rule is finalized. PwC also said that if enacted, the rule potentially would be the most consequential change to U.S. banking regulation since the 2010 passage of the Dodd-Frank Act.
Among its findings, PwC concluded that the rule is expected to harm GDP, regardless of what else is happening in the economy. “Reviews of academic literature suggest that U.S. banks are currently operating at or near optimal levels of capital,” the firm said. “Accordingly, negative effects on GDP growth would likely not be offset by the long-term gains achieved by reducing the probability of a financial crisis as the [proposed rulemaking] assumes.”
The rule would lead to less borrowing and high lending costs and could lead to either reduced returns to bank shareholders or increased costs to consumers, PwC said. The firm also noted that the differences between the U.S. proposal and the Basel III framework as adopted by other countries would result in different capital treatment for similar risks across global banks.
“The [proposal’s] requirements would raise costs for U.S. banks in ways that would not apply to foreign competitors for the same transactions,” PwC said. “This outcome would undermine the goal of having globally consistent capital requirements and create a misalignment of risk, whereby capital requirements for the same risks would differ by jurisdiction.”
