CONTACT: Barbara Hagenbaugh
(202) 457-8783
Washington, D.C. – U.S. financial regulators discussed the proposed rule to increase capital requirements for the largest banks today in their testimony before the Senate Committee on Banking, Housing, and Urban Affairs. Ahead of tomorrow’s hearing before the House Financial Services Committee, it is important that everyone understand the facts about the Basel III Endgame proposal.
Myth #1
Because the proposal only impacts 37 banks, the impact will be limited.
Fact: The banks subject to the proposed capital increase account for 81 cents of every $1 of banking assets.
The Basel III Endgame proposal is broad, touching American consumers and businesses across the country. The eight U.S.-based Global Systemically Important Banks alone are significant contributors to the economy, holding $93 billion in small business loans and $811 billion in consumer loans, investing billions of dollars in CDFIs and MDIs, and meeting two-thirds of the funding needs of other financial institutions.
Forum members – the eight U.S.-based Global Systemically Important Banks – hold $93 billion in small business loans, representing 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.
Forum members provide $811 billion in consumer loans, accounting for nearly half of all consumer loans by banks in the United States. Consumer lending supports loans for a variety of household needs, such as the purchase of a car or furnishing a new home.
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 more than $9 billion in CDFIs and $525 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.
The proposal would affect the availability and costs of all these services. Consequently, the proposal has broad consumer, business, and economic implications.
Myth #2
The proposal will not have a significant impact on the cost or availability of credit.
Fact: By raising capital requirements by nearly 20 percent, the proposal would inevitably lead to higher borrowing costs or limit access to capital for individuals, families, and small and mid-size businesses that rely on bank borrowing.
The proposal would significantly impact credit provision because of specific requirements for certain types of consumer and business lending, as well as a broader capital requirement for operational risk. This latter change is applied across the entirety of a bank’s balance sheet.
As noted by the Urban Institute, the National Housing Conference, the National Urban League, the NAACP, the Mortgage Bankers Association, and others, the proposal would negatively impact housing finance and homeownership, particularly low- and moderate-income borrowers and communities as well as Black and Hispanic borrowers. The proposal would also handicap small businesses by assigning a lower capital charge to public companies with access to the capital markets than to smaller businesses that rely primarily on bank borrowing.
In a higher interest rate and credit tightening environment, it is important to weigh the costs and availability of credit impacted by the Basel III Endgame, particularly for those that need it most.
Myth #3
Operational risk capital requirements represent a small portion of the increase in capital.
Fact: These new requirements are the key driver of the nearly 20 percent increase in required capital cited in the proposal and would serve as a $1.4 trillion tax on all products and services provided by large banks.
The new operational risk capital requirements account for 78 percent of the total proposed increase in required capital for the largest banks and would impact the cost and availability of all financial products and services provided by large banks, ranging from lending to securities underwriting to asset management services. Moreover, operational risks are already accounted for in the Federal Reserve’s stress tests, making the additional requirements in the capital proposal duplicative.
There is no clear or compelling evidence to suggest that operational risks present a concern commensurate with a $1.4 trillion dollar increase in risk-weighted assets that would represent the key driver of increased large bank capital requirements in the proposal.
Myth #4
The proposal will only impact large banks’ trading activities and will not have real consequences for consumers and investors.
Fact: The market-making capital requirement would increase costs and lead to smaller inventories and less liquid markets, raising costs for companies seeking investment capital and savers looking for a solid financial return on their capital.
The nation’s largest banks account for roughly three-fourths of market-making activity in the United States. Our capital markets allow businesses to raise funding for needed investments that grow our economy, support cities and counties in financing infrastructure projects, and provide companies and individuals with the ability to responsibly hedge their risks. At the same time, Americans use these markets to save and invest for future needs including retirement.
Driving up the costs for market-making activity means increased costs for U.S. companies looking to responsibly hedge their risk from commodity price fluctuations, interest rate changes, and foreign currency exchanges. Higher costs to hedge risks for U.S. industries like agriculture, travel, retail, and manufacturing translates to higher prices for all U.S. products, services, and goods when Americans go to the grocery store, fly to visit family and friends, or purchase any manufactured or retail good.
For example, a coffee company depends on a regular, predictable supply of coffee beans. To protect itself against a possible increase in coffee bean prices, the company could enter into a futures contract that would allow it to buy beans at a specific price on a particular date. That contract is a hedge. Higher costs of hedging could in turn mean higher prices for consumers. These additional requirements put American consumers and U.S. companies at a competitive disadvantage with the rest of the world.
Myth #5
Basel 3 Endgame will lead to harmonization of capital policies around the globe.
Fact: The U.S. proposal goes far beyond the Basel agreement, which is being weakened in other jurisdictions.
Although the United States was a key negotiator in the agreement that led to the Basel 3 Endgame agreement in 2017, U.S. regulators are again going beyond the accord, which would lead to an even wider gap in capital required of U.S. banks vs. their European competitors.
Large U.S. banks currently are subject to a risk-based capital requirement of 11.3 percent versus a requirement of 9.9 percent for large European banks. The central aim of Basel III Finalization was to increase the quality and quantity of European bank capital to improve the competitive landscape. However, the European Union is proposing to implement these reforms in a manner that deviates from the Basel standards.
More specifically, the European Banking Authority estimates that the EU approach will result in 3.2 percentage points less capital than would be achieved if the reforms were implemented in line with the Basel agreement. Further, the U.S. is gold-plating certain aspects of the Basel proposal such as the capital treatment of residential mortgage and retail credit exposures, which will further increase the significant disparity between U.S. and European capital standards.
Go to smartbankcapital.com to learn more about the strength and resiliency of the nation’s largest banks and the costs of higher capital requirements.
###
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.