4 questions that should be raised at the IMF & World Bank Spring Meetings

As global leaders congregate in D.C. this week for the International Monetary Fund & World Bank Spring Meetings, banking regulation will not likely be top of mind. Geopolitical and macroeconomic issues are likely to take center stage, and rightly so. Large banks have been a source of strength, resilience, and stability through the COVID-19 pandemic and the following years of volatility and adjustment. Even so, there are still several questions worth asking policymakers about the Basel III Endgame proposal.

How will regulators ensure that these proposed reforms do not further widen the uneven playing field of regulations for banks between U.S. and other jurisdictions?

The capital disparity between U.S. and European GSIBs already is high—At the end of 2022, U.S. GSIBs were required to hold $100 billion more capital than their European competitors. This is because large U.S. banks are subject to a risk-based capital requirement of 11.3% versus a requirement of 9.9% for large European banks. (Sean Campbell, "U.S. vs. European Capital Adequacy - The Increasingly Unlevel Playing Field Unfolding in Basel III Finalization," Financial Services Forum, 5/4/2023)
Federal Reserve Chair Jerome Powell explained that Basel III Endgame in the U.S. is a far stricter regulation than what is being implemented in other jurisdictions: "The proposal exceeds what is required by the Basel agreement, and exceeds as well what we know of plans for implementation by other large jurisdictions." (Federal Reserve Chair Jerome Powell, "Statement by Chair Jerome Powell," 7/27/2023)

How will proposed reforms support financial stability?

Imposing significant increases in requirements at American banks could jeopardize financial stability worldwide by pushing financial activities to the less-transparent, less-regulated non-bank sector. Quantitative analysis by Oliver Wyman estimates that $40 billion, or approximately 13%, of U.S. GSIB revenues could transition to foreign banks and nonbanks if the Basel III Endgame proposal is implemented. (Oliver Wyman, "Into the Great Unknown," 2023).
Former Federal Reserve Governor Randall Kroszner explained how this shift to non-banks could impact the U.S. economy at large: "As a result of the proposal, banks may reduce their activities or withdraw from providing critical products or services as they face nonbank competitors that are not subject to these regulations. Critically, this shift to nonbanks could have the unintended consequence of diminishing the financial stability and economic resiliency and vitality of the U.S. for a number of reasons." (Randall Kroszner, "The Basel endgame rule could undermine US financial stability," 2/29/2024)

Why do this now when it is clear the proposed changes could reduce access to credit and raise costs at a time when consumers and businesses are still facing higher prices and the Fed is focused on taming inflation?

Consumers will ultimately bear the cost of the proposal through increased prices for loans and everyday products. The impact will be felt across industries, with consumers seeing higher prices on everything from gas to cars to and food due to Basel III Endgame. Christopher Waller, Federal Reserve Governor, warned that Basel III Endgame could increase costs without "clear benefits" to the economy: "I am concerned that [this] Basel III proposal will increase the cost of credit and impede market functioning without clear benefits to the resiliency of the financial system. […] This will raise costs for American families and businesses, which could harm many of them and hinder economic growth." (Federal Reserve Governor Christopher Waller, "Statement by Governor Christopher J. Waller," Federal Reserve, 7/27/2023)

How can we ensure a clean energy transition without critical access to credit for clean energy projects?

Basel III Endgame would quadruple the required capitalization of non-publicly traded tax equity, from 100% to 400%, thereby categorizing clean energy projects as "risky investments" and essentially eliminating "a critical financing option for most clean energy developers." (Andrew Wills, "The Unintended Consequences of Basel III's Latest Reforms," Invenergy, 1/3/2024)

Basel III Endgame will have negative impacts on financial stability and the global economy and we urge regulators to consider the repercussions for consumers and businesses. Now is not the time to implement sweeping banking regulation—regulators need to scrap Basel III Endgame and start over.