As you may have seen, proponents of the Basel III Endgame are seeking to justify their faltering regulation by overlooking significant and far-reaching consequences that would harm consumers, communities, and our economy at large.
For example, the idea that banks can simply shrink their dividends or share buybacks to maintain their lending activity if capital requirements increase is completely misguided. This ignores the fact that bank regulatory capital policy has "zero to do with whether banks are profitable or whether firms choose to exchange shares for cash," as Kevin Fromer, CEO of the Financial Services Forum, explains.
Below are some additional facts noticeably missing from the talk track:
- U.S Global Systemically Important Banks are already well capitalized: "The banking system is very strong, well-capitalized, highly liquid, and does a much better job of understanding the risks that it runs and managing them than before the global financial crisis. And that's, that's a reflection of the work that regulators did and that the banks did, too. So that part of the financial system is critically very strong. And we saw that through the pandemic, and we see it now." (Federal Reserve Chair Jerome Powell, "The Semiannual Monetary Policy Report to Congress," YouTube, 2022)
- Basel III Endgame will decrease access to credit: "Increased capital requirements for certain types of loans may also lead to a reduction in credit availability or increased prices, which could disproportionately harm underserved markets, businesses, and communities. Ultimately, bank customers will bear the cost of these capital requirement increases." (Federal Reserve Governor Michelle Bowman, "Statement by Governor Michelle W. Bowman," Federal Reserve, 2023)
- The proposal's negative consequences would trickle down to consumers by decreasing businesses' ability to hedge against risks: "The use of derivatives to hedge commercial risk benefits the global economy by allowing a range of businesses—from manufacturing to healthcare to agriculture to energy to technology— to improve their planning and forecasting and offer more stable prices to consumers and more stable contributions to economic growth. Banking organizations that may be subject to the new Basel III Endgame capital requirements serve as critical counterparties to end-users for their derivatives transactions." (Coalition for Derivatives End-Users, Letter, 2023)
- "Basel III Endgame's impact on hedging will trickle down to consumers. For example, a coffee company depends on a regular, predictable supply of coffee beans. To protect itself against a possible increase in coffee bean prices, the company could enter into a futures contract that would allow it to buy beans at a specific price on a particular date. That contract is a hedge. Higher costs of hedging could in turn mean higher prices for consumers." ("The Basel III Endgame Proposal – Separating Fact from Fiction," Financial Services Forum, 2023)
- The proposal would have a "particularly perverse" effect on low- and moderate-income borrowers: "The NPR's [notice of proposed rulemaking] impact on lending to LMI [low- and moderate-income] borrowers and communities and to borrowers of color is particularly perverse in the face of efforts by the bank regulators and other government agencies to encourage banks to increase their lending to precisely these borrowers and communities." (Laurie Goodman and Jun Zhu, "Bank Capital Notice of Proposed Rulemaking," Urban Institute, 9/18/2023)
- Loans could become more expensive for businesses that are not publicly listed: "Businesses will be confronted with either higher costs or fewer options in nearly every product and service they access from affected banks. For example, small business loans will be more expensive given the proposed rule requires banks to hold more capital against credit exposures from companies that are not publicly listed." (U.S. Chamber of Commerce, Letter, 11/14/2023)
- The proposal does not directly address risks that caused the Silicon Valley Bank Failure: "The proposed capital rules require banks to have capital to account for the risks that loans won't be repaid, for operational risks, and for trading risks. They don't directly address the risks to banks posed by rapid increases in market interest rates or inadequate liquidity that were the primary cause of SVB's woes (along with supervisory failures)." (David Wessel, "What is bank capital? What is the Basel III Endgame?," Brookings, 2023)
The proposal's wide-scale impacts cannot be overstated. Beyond the ones outlined above, it would drastically impact American homebuyers, small businesses, manufacturers, the clean energy transition, and more. It’s time for regulators to go back to the drawing board on this rule.