San Antonio Express-News (Sunday)
Pulling the trigger on Basel III Endgame
The slogans sound ominous, like an advertisement for the latest Marvel Universe sequel or a first-person shooter video game. “STOP Basel III Endgame.” Arguments against it are all over social media and podcasts (at least the nerdy financial ones I listen to), and even an NFL game this fall.
So, like, can I buy this at GameStop?
Alas, it’s not as exciting as they’re making it sound. But I think I can make it seem less mysterious and ominous. Basel III Endgame is simply a set of proposals to bring large U.S. banks under internationally agreed standards for the capital they hold and against risks they take.
If you’ve been paying attention to our slow-moving banking crisis, you might think this is a reaction to the failure of Silicon Valley Bank and a few others last spring. It isn’t.
The risk rules called Basel III are a response to the 2008 global financial crisis. An international bank regulatory group that meets in Basel, Switzerland, came up with them back in 2010. Hence the name.
The Basel Committee includes all the big U.S. banking regulators — the Federal Reserve, FDIC, New York Fed and the Office of the Comptroller of the Currency — along with banking representatives of 26 other countries. Most of the rest of the world long ago brought their banks under the Basel III standards. The U.S. has put off implementation. We’re the last ones to comply.
But in July, the Federal Reserve and FDIC proposed finally having big U.S. banks comply with international Basel III standards, with the name “Endgame.”
So, game on.
The standards
What are the new standards and requirements? One is to limit banks’ internal models for assessing risk and rely instead on external models. So that’s not popular.
Since last fall, my own bank accounting hobbyhorse has been the acknowledged fact that banks have been allowed to pretend their bond portfolio losses — which stem from 2022 interest rate hikes — aren’t real losses and don’t really affect their riskiness. (They do.)
Basel III Endgame would require banks to include losses on their bond portfolios in considerations of bank safety and solvency. That seems good.
Another requirement — probably the most consequential one for banks — is for them to hold more capital on their books in response to holding risky assets. They’ve already done this once since 2008, so the increased capital — estimates of the need range from 16% to 20% — feels overburdensome and unprofitable to bankers.
Holding capital as a safety cushion against risks is inefficient. Banks generally want to hold the least of it allowable by their regulators. Very thin capital allows them to attempt to make more profit. But little or no capital puts a bank at more risk that loan losses will make the bank insolvent or cause lenders and depositors to lose trust in the bank. So
there’s a real trade-off between safety and profit.
In the broadest strokes, banks mostly don’t want to be told how to run their businesses, so they’re pushing back aggressively on the Basel III Endgame proposals. In this sense it resembles your basic “Should there be more regulatory oversight of businesses?” question with Democrats classically saying yes and Republicans classically saying no.
That seems to be why Texas’ Sen. John Cornyn has joined 38 of his Republican Senate colleagues in pushing back on Basel III Endgame enactment.
But in the weeds it gets a bit more nuanced.
One thing that increases capital requirements for banks under the proposed new rules are nontraditional lines of business, including one called “tax equity investments,” a method of financing renewable energy projects under the 2022 Inflation Reduction Act. If Basel III Endgame makes renewable energy investment more difficult, you can suddenly get a bipartisan group interested in opposing new regulations.
And that seems to be why Democratic U.S. Rep. Colin Allred, who is challenging Republican Sen. Ted Cruz for his seat, signed a letter expressing concern about Basel III and the tax credit issue.
Which banks?
The proposal only applies to large banks, defined as those holding more than $100 billion in capital and that meet a few
other criteria about complexity of operations. Just 28 U.S. banks have more than $100 billion in assets, while 37 in total would have to comply with Basel III Endgame rules. There are about 4,700 banks in the country, so very few would be affected at all.
But smaller community banks in the United States don’t trust that the rules will only apply to large banks and
also are fighting them.
In San Antonio this month, Federal Reserve System Governor Michelle Bowman spoke at the American Bankers Association 2024 Conference for Community Bankers, a gathering of exactly the sort of smaller banks worried the new rules are coming for them next.
I particularly appreciated that she referenced the 1984 movie “This Is Spinal Tap” — my all-time favorite — in questioning whether to “crank the dial up to 11 on regulatory requirements.”
Last summer, when committees of the Federal Reserve and FDIC voted along party lines to propose the changes, she explained why she voted “no” on pushing forward with Basel III Endgame.
“In my view, there is insufficient evidence that the benefits produced by this proposal would justify the costs,” she said in a statement. “The proposed revisions under consideration have not been directed by Congress and are not compelled by a new evolution or identified weakness in the U.S. banking system.”
In the Federal Reserve’s language proposing Basel III Endgame, it acknowledges that “capital requirements would modestly increase for lending activities, which could result in a slight reduction in bank lending. However, staff estimates the economic costs of this modest reduction resulting from the proposal’s strengthened requirements would be offset by the economic benefits of a more resilient financial system.”
In other words: Yes, slightly less banking could occur. But, also, safer banking is good. I tend to agree.