An unlikely coalition of banks, community groups and racial justice advocates proposed in July to federal regulators to update rules governing how U.S. banks protect themselves from potential losses. We are asking them to reconsider their plans.
Regulators will increase the amount of capital (cash-like assets) banks must hold to deal with emergencies to avoid needing taxpayer bailouts like the 2008 financial crisis I'm asking you to. Last year, three mid-sized and four small banks collapsed under pressure from rising interest rates and losses from crypto businesses, reinforcing regulators' view that additional capital is needed. Financial regulators around the world, including the European Union and the United Kingdom, have adopted similar standards.
Banks have long complained that holding too much capital can make them less competitive, limit lending and hurt economic growth. What's interesting about the latest proposals is that groups not traditionally aligned with banks have also joined in the criticism. That includes pension funds, green energy groups and other groups concerned about the economic impact.
“It's a Biblical dynamic: Capital grows and banks scream,” said Isaac Boltanski, an analyst at brokerage BTIG. “But this time it's a little different.”
Bank lobbyists renewed their push to kill the proposal on Tuesday, the last day of a months-long period during which the public can submit comments to regulators about the proposal. There is no sign that regulators will completely withdraw the proposal, but the flood of complaints against it will likely force major changes before it is finalized.
What is the purpose of rules and why are they important?
The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (the agency that sets the final rule) want to synchronize U.S. standards with those developed by the International Basel Committee on Banking Supervision. Although the commission has no direct regulatory authority, regulators are following the guidelines in the hope that an agreement on how much capital the world's big banks should hold will help avert a crisis.
The new capital rules apply only to institutions with assets of $100 billion or more, including 37 holding companies of U.S. and foreign banks. Some rules are more narrowly tailored to institutions large enough to be considered systemically important by regulators. Regulators and financial industry observers have dubbed the rule the “Basel III endgame” because it is an attempt by the U.S. government to implement a 2017 proposal by the Basel Committee, also known as Basel III. .
If some version of the U.S. plan is completed this year, the rules would go into effect in July 2025 and be fully operational by 2028.
What is the bank's position on this?
Banks have long complained that they need to hold more capital to offset the risks posed by lending, trading and other day-to-day operations. They also object to the latest plan, which is 1,087 pages long. Industry efforts to block the proposal include websites like americanscantaffordit.com and stopbaselendgame.com, a steady stream of research papers detailing the plan's failures, and a campaign on Capitol Hill. There have been threats to influence and even sue regulators.
On Tuesday, two lobbying groups, the American Bankers Association and the Bank Policy Institute, reported how the proposed rules would push lending activity into the shadow banking industry, reduce market liquidity, and “significantly and permanently reduce GDP and employment.” will decrease.”
Banks are particularly offended by proposals to hedge the risks posed by mortgage lending. This option is one of several set out in the plan, but it is the one that has received the most attention, forcing you to pay more attention to the characteristics of each loan and, in some cases, changing the current would assign a much higher risk score than the
The rule could result in the suspension of loans to borrowers deemed not to be sufficiently secure. This could hurt people without stable banking relationships, including first-time homebuyers and Black Americans, who regularly face racial discrimination from the banking industry.
Banks also said the rule would make it harder for private companies to lend because they would be seen by banks as riskier borrowers than publicly traded companies, which would have to disclose more financial information. also states. Banks argue that many private companies are as safe or safer than some publicly traded companies, even if they don't have to meet the same financial reporting requirements.
Who else would be upset?
Some liberal Democrats in Congress and nonprofit groups dedicated to closing the racial wealth gap are concerned about the plan's treatment of mortgages. Some say some of the proposals could harm renewable energy development by removing tax incentives for financing green energy projects.
The National Community Reinvestment Coalition, which encourages banks to expand in areas with large black and Hispanic populations where banks have a weak presence, said part of the proposal would be “unnecessarily difficult for low-wealth people with overly strict capital requirements.” “Mortgage loans are likely to become significantly more expensive.” population. ”
Pension funds, which would be considered private rather than public enterprises under some of the proposals, argue that banks would unfairly treat them as riskier financial market participants than they actually are.
Are the concerns valid and will they force regulators to change their plans?
There is no doubt that even if regulators issue a final proposal, it will be different from the July proposal.
“We want to make sure these rules support a vibrant economy, support low- and moderate-income communities, and ensure that there are appropriate adjustments in things like mortgages,” said Michael S. Barr, the Fed's vice chairman for oversight. Stated. .9, during a financial industry event in Washington. “The public comments we're getting on this are very important for us to get that. We take it very seriously.”
Most observers believe criticism of the plan will force regulators to make significant changes. But not everyone agrees that the future under the new rules is so clearly bleak. Americans for Financial Reform, a progressive policy group, said in a comment letter generally praising the proposal that banks would make more loans when they have more reserve capital, but less. He argued that research shows that banks make more loans than they do.
Still, “we're seeing complaints from more entities than usual on this,” said Ian Katz, banking regulation analyst at Capital Alpha.
That may mean banks are really onto something this time, even if they've heard warnings about financial pain. But Katz said the future is not as predictable as banks suggest. Some companies may exit lending under stricter capital controls, while others may see an opportunity to increase market share now that their former competitors are gone.
“We don't know how individual companies will react to the final rule,” he said.
