Basel III Accord U.S. Implementation
After the 2008-09 global financial crisis, the Basel Committee on Banking Supervision, the global standard setting body for bank regulation, agreed on a complete overhaul of bank capital standards. Those overhauled standards, known as “Basel III,” largely have been implemented worldwide, including in the U.S. and Europe. Generally speaking, these standards define minimum bank capital requirements – the amount of capital banks must hold to cover potential losses – for assets such as corporate loans and home mortgages.
At the end of 2017, the Basel Committee (of which the U.S. and 27 other major jurisdictions, including the EU, are members) made substantial changes to Basel III, despite its successful track record, generally with the goal of bringing assessment of credit risk more under governmental control. Currently, regulators in the EU, U.S. and other countries are preparing to revise their regulations to implement the Basel III endgame agreement. The EU issued proposed revisions at the end of 2021, and the U.S. is expected to follow sometime this year.
If U.S. regulators interpret Basel III endgame in an extreme way, domestic banks will face capital requirements that outweigh those of their foreign rivals and overstate businesses’ actual default risk. Instead, U.S. regulators could adopt a version of Basel III endgame similar to the EU approach that recognizes the true creditworthiness of business loans that banks must hold capital on. This outcome would reduce the cost of credit for U.S. businesses of all sizes, including small businesses, and allow them to compete fairly with global peers.
Why it Matters
Rising Credit Costs for American Businesses
The European Approach to Implementation
BPI’s Recommendation: U.S. regulators should adopt a version of Basel III Endgame similar to the E.U. approach that recognizes the true creditworthiness of business loans that banks must hold capital on. This outcome would reduce the cost of credit for U.S. businesses of all sizes, including small businesses, and allow them to compete fairly with global peers.