By Hugh Carney
ABA Viewpoint
The drawn-out Basel III “endgame,” or B3E, process in the U.S. has highlighted the urgent need for regulators to improve transparency in the international financial standard-setting process. While this may sound like an arcane issue, it has far-reaching consequences for millions of Americans across diverse sectors of the economy.
Agricultural groups, small business advocates, social justice organizations, utility companies and other users of credit and financial services all raised concerns about the endgame’s potential to restrict credit and raise costs. This breadth of opposition reveals a core truth: the implications of international banking standards extend well beyond the banking industry itself.
Yet despite their keen interest in the outcome, many of these stakeholders do not have the opportunity to participate in the international standard-setting process. Small businesses, regional chapters of social justice groups and other affected parties often remain unaware of these negotiations until the proposals are finalized and on the verge of implementation in the United States (or worse, when they first confront changes to the pricing and services from their banks). U.S. regulators must address this gap by making international standard-setting processes more inclusive, transparent and accountable for the benefit of all stakeholders.
The U.S. B3E proposal demonstrates the dangers of an opaque process. Many observers were surprised by the number of voices outside the banking sector that submitted comment letters in response to the U.S. proposal — but they shouldn’t have been. The proposal, designed to bolster bank resilience, would restrict credit and raise costs for various sectors including:
- Agriculture: Farmers and food producers worry that increased costs for clearing services and financing will disrupt hedging operations to manage market risk and raise food prices.
- Small businesses: Higher capital requirements threaten to reduce credit availability, increase borrowing costs, and constrain growth for America’s entrepreneurial backbone.
- Social justice: Groups like the NAACP and National Housing Conference highlight that stringent capital rules could make it harder for minority and first-time homebuyers to access mortgages, exacerbating housing unaffordability and wealth gaps.
- Utilities: The cost of hedging fuel costs and financing for other essential services is expected to rise, potentially burdening consumers with higher bills.
The breadth of the B3E raises a crucial question: Why weren’t these voices heard earlier while the Basel Committee was considering proposals?
The Basel Committee on Banking Supervision, which drafts proposals like Basel III, operates in an environment that lacks transparency and broad accountability. While documents are made available for public comment, these efforts often occur late in the process — after key decisions have already been made and regulatory frameworks largely agreed upon by the agencies gathering in Switzerland. There is merit in the search for international regulatory harmony, but not at such great potential cost to the public interest.
U.S. regulators, deeply involved in these negotiations, often treat international agreements as a fait accompli, implementing them domestically with limited opportunity for significant revision. By the time these rules are open for public comment under the Administrative Procedure Act, affected stakeholders find themselves reacting to near-finalized standards rather than shaping them. As a result, domestic interests — particularly those outside the financial industry — are sidelined until it’s too late for their perspectives to make a difference, with significant consequences for our economy. Bankers faithfully reflect the views and interests of their customers and communities, but the U.S. B3E process highlighted the importance and power of those cohorts’ unfiltered voices, and they should at least have the opportunity to weigh in before the proposed standard comes to our shores.
Nonbanks, particularly smaller ones, and non-financial companies typically do not monitor the Basel Committee’s activities. They lack the resources or expertise to engage in a process dominated by financial regulators and industry specialists. This exclusion exacerbates the disconnect between global standard-setting and the needs of diverse U.S. constituencies.
U.S. regulators can and must take steps to bridge this gap. Transparency, inclusivity and accountability should be the cornerstones of U.S. participation in international standard-setting. Specifically:
- Advanced notices of proposed rulemaking: Before engaging in international negotiations, U.S. regulators should issue ANPRs outlining the issues to be addressed, potential solutions, and anticipated impacts on U.S. businesses and consumers. This step would provide a forum for public input early in the process, ensuring a broader range of perspectives are considered.
- Regular stakeholder engagement: Regulators should actively solicit input from nonbank stakeholders, including agricultural, small business, housing, and utility groups, as well as from banks. By creating formal mechanisms for these groups to provide feedback, U.S. agencies can ensure that international standards align more closely with domestic economic realities. U.S. regulators should carry the resulting insights into their discussions with foreign counterparts.
- Congressional oversight: Congress should play a more active role in overseeing U.S. engagement in international standard-setting. Regular reporting to legislative bodies can enhance accountability and ensure that American interests are prioritized in global negotiations.
International banking standards are often viewed as technical exercises focused solely on large banks and financial stability. But as the B3E demonstrates, their implications are much broader. Is Basel III a banking rule? Yes. But it is also an agricultural rule, a small business rule, a social justice rule and a utilities rule, among others.
To reflect this reality, U.S. regulators must make an effort to hear from a wider range of stakeholders as they consider banking rules. The banking system exists to serve the economy, so effective regulation must account for the broader economic and social context in which banks operate.
The stakes are high. While it is now considered unlikely to finalized as proposed, if at all, the B3E proposal risks hampering economic growth, increasing inequality and raising costs for everyday Americans. But these outcomes are not inevitable — they are the result of a process that has failed to include all relevant voices. It’s time for regulators to chart a better way forward, not only concerning bank capital, but throughout the Basel process.
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.
