This week, Federal Reserve Governors Michelle Bowman and Lisa Cook discussed the potential risks of the nonbank sector to the economy. Basel III Endgame would only further exacerbate these risks by pushing financial activity and vulnerable consumers into the less-regulated shadow banking sector. This coincides with the Federal Reserve Board today finding, once again, that "the banking system remains sound and resilient."

Here's what Governors Bowman and Cook had to say:

• Federal Reserve Governor Michelle Bowman said this morning activity shifting to the nonbank sector could have severely adverse impacts on financial stability: "Driving risk out of the regulated banking system could lead to marginal improvements in bank safety and soundness, but the consequences for financial stability could be severely adverse. As I noted above, we have already seen reduced market activity driven by the leverage ratio and other regulatory constraints on bank balance sheets. We have also seen banks tighten credit standards and reduce lending activity, which often leads to a credit 'gap' left to be filled by nonbank lenders. As activity and risk migrates from the banking system to nonbanks, we should ask how these shifts will impact financial stability over the long run, even though we have less visibility and insight once they leave the banking system." (Federal Reserve Governor Michelle Bowman, "Financial Stability Risks: Resiliency and the Role of Regulators," Federal Reserve, 5/10/2024)
• Federal Reserve Governor Lisa Cook, while saying earlier this week she did not see immediate risks in the nonbank sector, pointed to the rapid growth in the private credit market to $1.1 trillion and the role of increased banking requirements in the migration of activity outside of the highly regulated banking sector: "I will be monitoring the contribution of private credit to the overall leverage of the business sector and the evolving interconnectedness between private credit and the rest of the financial system." (Federal Reserve Governor Lisa Cook, "Current Assessment of Financial Stability," Federal Reserve, 5/8/24)

Basel III Endgame would exacerbate the movement of financial activity outside the regulated banking system, undermining consumer protections and weakening financial stability. This is yet another reason that regulators need to scrap the proposal and start over.