An unlikely coalition of banks, community groups and racial justice advocates are urging federal regulators to rethink the plan they proposed in July to update the rules governing how U.S. banks protect themselves from potential losses.
Regulators are calling for an increase in the amount of capital – cash-like assets – that banks must hold to tide them over in emergency situations to avoid the need for a taxpayer-funded bailout like the one that occurred in the 2008 financial crisis. Last year, under pressure from rising interest rates and losses from cryptocurrency companies, regulators’ views that additional capital was necessary were strengthened. Financial regulatory bodies around the world, including the European Union and Britain, are adopting similar standards.
Banks have long complained that holding too much capital forces them to be less competitive and restrict lending, which can hurt economic growth. What’s interesting about the latest proposal is that groups not traditionally aligned with banks are starting to join in the criticism. These include pension funds, green energy groups, and other organizations concerned about the economic consequences.
“This is the textbook dynamic: capital is rising, banks are screaming,” said Isaac Boltanski, an analyst at brokerage BTIG. “But this time it’s a little different.”
On Tuesday, the last day of a period of months in which members of the public can submit comments to regulators about the proposal, banking lobbyists made a new push to repeal it. While there is no indication that regulators will withdraw the proposal entirely, the barrage of complaints about it will likely force them to make major changes before it becomes final.
What are the objectives of the rules, and what is their importance?
The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency – the agencies that will set the final rules – want to synchronize US standards with those developed by the Basel International Committee on Banking Supervision. The committee has no direct regulatory authority, but regulators are following its guidelines in the hope that agreement on how much capital big banks around the world should hold will help avert a crisis.
The new capital rules will only apply to institutions with assets of $100 billion or more — including 37 U.S. and foreign bank holding companies. Some rules are even more narrowly tailored to large organizations to the extent that regulators consider them to be systemically important. Regulators and financial industry participants call the rules the “Basel III endgame” because they represent the US government’s attempt to implement a proposal put forth by the Basel Committee in 2017 called Basel III.
If some version of the proposed US plan is finalized this year, the rules would go into effect in July 2025 and be fully operational by 2028.
Where do the banks stand on this?
Banks have long complained about having to hold more capital to offset the risks posed by loans, trading operations and other day-to-day activities. They also oppose the latest 1,087-page plan. Industry efforts to thwart the proposal have included websites such as americanscantaffordit.com and stopbaselendgame.com, a steady stream of research papers detailing the plan’s failures, influence campaigns on Capitol Hill, and even threats to sue regulators.
On Tuesday, two lobbying groups, the American Bankers Association and the Bank Policy Institute, submitted a comment letter, more than 300 pages long, enumerating ways in which the proposed rules could drive lending activity to the shadow banking industry, reduce market liquidity and cause “a significant and permanent decline in… GDP and employment.
Banks are particularly uncomfortable with the proposal to protect against the risks posed by mortgage lending. The option — one of several laid out in the plan but which has attracted the most focus — would force them to pay more attention to the characteristics of each loan and in some cases assign a much higher risk score to the loans than they currently do.
They say the rule could make them stop lending to borrowers they don’t consider safe enough. This could hurt first-time homebuyers and those without established banking relationships, including Black Americans, who regularly face racism from banking.
Banks also say the rules will make it harder for private companies to get loans by forcing banks to consider them riskier borrowers than public companies, which must disclose more financial information. Banks say many private companies are just as safe as some public companies, or safer, even if they don’t have to meet the same financial reporting requirements.
Who else is upset?
Some liberal Democrats in Congress and nonprofits dedicated to closing the racial wealth gap are concerned about the plan’s treatment of mortgages. Others say parts of the proposal could hurt renewable energy development by taking away tax benefits for financing green energy projects.
The National Community Reinvestment Coalition, which pushes banks to do more business in majority-Black and Latino neighborhoods where banks often have little presence, warned that parts of the “overly aggressive capital requirements” in the proposal would likely make mortgages more Highly expensive for low-net-worth individuals. “Population.”
The pension funds, which would be considered private rather than public companies under parts of the proposal, say it would force banks to unfairly treat them as riskier financial market participants than they actually are.
Are the fears valid? Will they force regulators to change their plan?
There is no doubt that the regulators’ final proposal, if issued, will be different from the July proposal.
“We want to make sure that the rule supports a vibrant economy, supports low- and moderate-income communities, and that it gets the calibration right for things like mortgages,” Fed Deputy Chairman for Supervision Michael S. Barr said in January. 9. During a financial industry event in Washington. “The public comment we receive on this is critical for us to get. We take it very seriously.”
Most observers believe that criticism of the plan will force regulators to make fundamental changes. But not everyone agrees that the future under the new rules is clearly bleak. Research showed that banks made more loans — not less — when they had more capital in reserve, Americans for Financial Reform, a progressive policy group, said in its comment letter, which generally praised the proposal.
However, “there are more complaints about this from more groups than there normally are,” said Ian Katz, an analyst at Capital Alpha who covers bank regulation.
That could mean the banks are on to something this time, although their warnings of economic pain sound familiar. But Katz said the future is less predictable than the banks suggest. While some may step back from lending under stricter capital rules, others may see an opportunity to increase their market share in the absence of previous competitors.
“We don’t know how individual companies will respond to this as a final rule,” he said.