CONTACT: Barbara Hagenbaugh
(202) 471-0436
bhagenbaugh@fsforum.com
Dispelling Five Myths
Washington, D.C. – U.S. regulators are expected to issue a proposal to implement an international accord, known as Basel III Finalization, that would significantly raise requirements for the largest U.S. banks. In anticipation of this proposal, it is important that everyone understand the facts.
Myth #1
The largest U.S. banks need more capital.
Fact:
Policymakers have regularly attested to the strength and resiliency of the largest U.S. banks.
Further, these policymakers – across the political spectrum – have underscored how the nation’s largest banks have supported the economy and the broader financial sector during the pandemic and recent banking events.
Proof points of this strength and resiliency can be found in this week’s Federal Reserve Supervision and Regulation report, which noted, “As of the fourth quarter of 2022, banks in the aggregate were well capitalized, especially U.S. global systemically important banks (G-SIBs).” Further, consulting firm PwC recently found that the capital levels of the largest U.S. banks were in line with academic research of optimal capital levels.
Myth #2
Raising capital requirements on the largest U.S. banks does not impact the economy.
Fact:
Capital is connected to activity throughout the economy.
According to PwC, higher capital requirements lead to more expensive and fewer loans for families and businesses. A particular impact could be felt by small businesses and households in historically underserved communities.
Federal Reserve Chair Jerome Powell has acknowledged the negative impact to credit availability as a consequence of increased capital requirements, testifying recently, “It’s always a balance” and “you will at the margin provide less credit, the more capital you have to have.”
Higher capital requirements also increase financial risk by pushing activity outside of the regulated banking sector while also harming the competitiveness of the U.S. banking sector, which already faces higher requirements than foreign competitors.
Myth #3
Raising bank capital is not costly because, whatever the size of the capital increase, a “long transition period” will be provided to attenuate the costs of complying with the new and higher requirements.
Fact:
Costs are nearly instantaneous despite government transition periods.
Financial market participants respond to new information about capital requirements and other regulatory changes as soon as they are announced, irrespective of government transition periods. As a result, banks act to come into compliance with new rules in a matter of months following announced policy changes. The costs, therefore, are borne in full shortly after being announced.
Indeed, research from the Federal Reserve documents that in the case of the implementation of Basel III, banks began to increase their capital ratios “prior to the publication of the specific language applicable to US banks” and that “bank responses we estimate take place well before the Basel III rules started to come into force after 2014.”
Myth #4
New and higher Basel III Finalization capital requirements will only impact large banks’ trading activities.
Fact:
New and higher capital requirements will impact a broad range of functions at the largest banks, including lending.
Basel III Finalization is expected to impact a wide array of bank lending activities as it contains significant changes across the entire capital framework. Some have estimated that the new capital rules will increase overall capital – across the entire bank – by up to 20 percent. Specifically, the new capital requirements, as agreed to internationally, contain a new methodology for capitalizing operational risk that is applied across the entirety of a bank’s balance sheet. Basel III Finalization also contains significant changes to the capital rules that are expected to impact corporate and consumer lending.
Myth #5
Large banks only serve large corporations.
Fact:
The nation’s largest banks hold roughly $85 billion in small business loans, invest in CDFIs and MDIs, and meet two-thirds of the funding needs of other financial institutions.
Forum members – the eight U.S.-based Global Systemically Important Banks – hold roughly $85 billion in small business loans, representing roughly one-third of all small business loans made by banks. Additionally, Forum members reach small businesses all across the country and in all industry segments. Throughout the pandemic, Forum members facilitated $94 billion in loans to nearly 1.25 million small businesses through the government Paycheck Protection Program (PPP). More than a quarter of these loans were made in low- and moderate-income communities and 91 percent of the PPP loans made by Forum members went to businesses with 20 or fewer employees.
The nation’s largest banks are also an important source of financing for Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs). U.S. GSIBs have invested nearly $9 billion in CDFIs and $500 million in MDIs and provide technical assistance and employee training to maximize the important reach CDFIs and MDIs have into underserved communities.
Moreover, U.S. GSIBs meet two-thirds of the funding needs of other financial institutions made by banks. This supports the ability of institutions such as community banks, insurance companies, and mortgage finance companies to provide important services to businesses and households.
For more facts, click here.
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The Financial Services Forum is an economic policy and advocacy organization whose members are the chief executive officers of the eight largest and most diversified financial institutions headquartered in the United States. Forum member institutions are a leading source of lending and investment in the United States and serve millions of consumers, businesses, investors, and communities throughout the country. The Forum promotes policies that support savings and investment, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.