Today, American Banker ran an op-ed by former Federal Reserve Governor Randall Kroszner on the unintended consequences of Basel III Endgame. In particular, shifting activity from the regulated financial sector to the shadow banking sector has not been accounted for by regulators.

• Kroszner explains that Basel III Endgame could accelerate migration to the non-bank sector: "Since the Global Financial Crisis, I and others have expressed significant concerns about migration of bank activity to the non-banks. As I describe in a recently published paper, I am concerned that a proposal from the U.S. banking regulatory agencies called the Basel III Endgame will accelerate this migration to non-banks that face less, if any, regulation and supervision."
• He explains that regulators have not provided an adequate analysis of the impacts and there is no thorough justification of the costs: "Capital is a blunt regulatory instrument that has the potential for unintended consequences. The agencies provided only a very broad qualitative assessment of the proposal's costs and benefits and did not provide thorough analyses supporting their conclusions that the benefits of the proposal outweigh its costs."
• If finalized, many groups will be adversely affected and economic growth could suffer: "[Regulators] should undertake a cost-benefit analysis of the proposed revisions. Otherwise, some groups could be disproportionately adversely affected, and investment and therefore economic growth could suffer."

Regulators need to go back to the drawing board and thoroughly evaluate the costs of the proposal.