The House Subcommittee on Financial Institutions and Monetary Policy held a hearing yesterday featuring an attack on the Basel III Endgame capital requirements rule proposed by the Fed and other financial regulators in July. The comment period for the proposal is January 16. We have seen the banking industry’s ads on TV and social media pillorying the proposal, suggesting dire consequences for retail borrowers.
Yesterday’s hearing featured a reprisal of these ads, replete with suggestions about opaque international bodies drafting rules and regulators ceding sovereignty to comply. Below, we address the many misleading attacks the GOP hurled at regulators and the Democratic rejoinders to them and lay out the policy stakes behind the proposal.
The House Committee on Financial Services Subcommittee on Financial Institutions and Monetary Policy convened yesterday for a hearing, during which Subcommittee Republicans continued their ongoing attack on U.S. bank regulators’ proposal, issued this summer, to implement the final components of the Basel III agreement, also known as the Basel III endgame, which include a new set of capital requirements for the largest financial institutions.
Republicans Canards: US Regulators and International Orgs.
While Republicans and banking industry groups have leveled many criticisms against recent proposals by American banking regulators, yesterday’s hearing was targeted at the regulators themselves — particularly the Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of Currency (OCC), and the National Credit Union Administration (NCUA).
Subcommittee Chair Andy Barr (R-KY) painted a distorted, convoluted picture of U.S. bank regulators ceding portions of their authority to international organizations via their engagement with those bodies to the detriment of the United States’ national interest. Subcommittee Ranking Member Bill Foster (D-IL) referred to the premise of the hearing as the “fever dreams of some sort of… takeover by world government” rather than a response to the world as it is. Subcommittee Republicans mainly claimed that:
- Federal banking officials use their desire to align with agreements or commitments made within inter-governmental organizations to justify their push for new proposals
- Federal banking regulators are ceding U.S. sovereignty and importing international standards into our regulatory system
Subcommittee Republicans accused U.S. financial regulators of increasingly ceding portions of their authority to international intergovernmental organizations, including the Bank for International Settlements (BIS), where the Basel Committee on Banking Supervision (BCBS) is headquartered; the Financial Stability Board (FSB); and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS); as well as the Biden administration.
As Democrats at the hearing pointed out, those claims depart from reality. The impression created by Subcommittee Republicans of U.S. bank regulators’ participation in international bodies discounts the value of the U.S. voice in those international discussions. U.S. regulators do not passively participate in international organizations and blindly accept their recommendations wholesale. In fact, the U.S. is seen as the leader in the Basel Committee, and America’s participation in this and similar groups has historically enabled our banking regulators the opportunity to provide global leadership in international discussions of financial regulation. While serving as the Trump-appointed Federal Reserve Vice Chair for Supervision, Randal Quarles chaired the FSB until December 2021.
America’s participation in the Basel Committee has helped the U.S. shape global standards. As Renita Marcellin, Advocacy and Legislative Director at Americans for Financial Reform, pointed out in her testimony, the Supplemental Leverage Risk Ratio included in the third Basel accords was shaped to resemble U.S. banking measures. Former Treasury Secretary Steven Mnuchin even noted that “a lot of Basel III is about bringing European capital standards closer to ours.”
Additionally, bank regulators are not statutorily obligated to implement the recommendations of the inter-governmental bodies they participate in. U.S. banking regulators comply with domestic law, including the Administrative Procedures Act, to ensure that domestic regulations are only finalized after considering feedback from stakeholders.
Republicans Pushback on Basel III Endgame Proposal
The Fed, FDIC, and OCC’s Basel III Endgame joint proposal would enhance the financial system’s ability to withstand periods of stress like the one seen following the collapse of Silicon Valley Bank and other firms this spring. The proposal would implement stricter capital requirements on banking firms with $100 billion or more in total assets and firms that engage in significant trading activities. It would increase common equity tier 1 capital requirements by an average of 16 percent across the largest banks.
The proposed rule would implement the final components of the Basel III or “Basel Endgame” regulatory capital framework, the final set of reforms published by the BCBS in December 2017.
Republicans and the banking industry have publicly pushed back against the proposal since before its release in late July. In September, six banking industry groups sent a letter to the Fed, FDIC and OCC, calling for the regulators to release a new proposal with more information and begin a new 120-day comment period. Last month, regulators extended the deadline for public comment on the proposal from November 30 to January 16, 2024.
The banking industry has claimed that higher capital requirements under the proposal would prevent banks from having more funding available to lend to consumers and retail borrowers. As Marcellin highlighted in her testimony, a December 2022 study found that bank lending actually grew in the aggregate following the Basel III reforms, both for banks above the initial median of a given regulatory ratio and banks below the initial median of that regulatory ratio, for each of the four regulatory ratios under analysis where aspects of the proposal have been implemented already.
Criticisms of the Basel III Endgame proposal by the banking industry, echoed by their Republican allies, are designed to preserve the status quo for the minority of banks that would be affected by the proposal.
Package of Proposals to Enhance Banking Resilience
The Basel III Endgame proposal is one of numerous recent proposals by bank regulators to strengthen the resilience of the financial system released following the recent turmoil in the banking sector. These include the:
- G-SIB surcharge proposal (proposed by the Fed): The proposal identifies and establishes risk-based capital surcharges for global systemically important bank holding companies (G-SIBs).
- Long-term debt requirements proposal (proposed by the Fed, FDIC, and OCC): The proposal would require banks with $100 billion or more in total consolidated assets to increase their reserves of long-term debt.
- Resolution planning requirements proposal (proposed by the FDIC): The proposal would strengthen the FDIC’s current resolution plan rule by requiring FDIC-insured depository institutions with more than $100 billion in assets to submit more robust resolution plans and requiring those with total assets between $50 and $100 billion to submit more limited informational filings.
Comment periods for each of the three proposals end on November 30.
Federal Reserve Vice Chair of Supervision Michael Barr has also announced that the Fed will incorporate multiple exploratory scenarios, both for the broader macroeconomic scenario and the global market shock for trading banks, into its annual stress test program. The intention is to expand the risk captured by tests used by the Fed to measure the resilience of large banks.
The Fed’s update of its stress testing process is a welcome development given that such examinations failed over recent years to assess how banks would fare in an environment where interest rates rise quickly. Ensuring that the most systemically important banks are capable of withstanding such a hypothetical is all the more important as the Fed is engaged in its most aggressive cycle of interest rate hikes since the 1980s, in which it has increased the federal funds rate from near zero to the 5.25 to 5.5 percent range in under two years.
While models and guidelines set by regulators are incapable of preparing banks to withstand every risk, the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank earlier this year highlight the need for stronger guardrails to protect the broader financial system and domestic and international economy from the systemic risk posed by the risk management failures of a few banks. Although the banking sector has largely stabilized, recent events have exposed the vulnerabilities of banks of all sizes. Therefore, it is imperative that banks adopt more robust and resilient risk management practices and comply with the regulatory standards that aim to ensure the safety and soundness of the banking industry.
20/20 Vision supports bank regulators’ Basel III Endgame proposal and the implementation of additional guardrails to prevent risk to the broader financial system posed by the next bank failure.
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