Policy Implications and Potential Risks to the U.S. FInancial System

Basel III Accord U.S. Implementation

Background

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 Alternative

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.

Research and Analyses

Comment Letters

U.S. Small Businesses Could Soon Be Paying More for Loans, Unless U.S. Regulators Act
U.S. and international regulators are currently implementing the Basel III framework, which includes rules around how much capital banks must hold to fund loans. While the European Union is considering giving small businesses flexibility, possible actions by U.S. regulators could result in U.S. small businesses paying more for loans than similar companies operating in Europe. Furthermore, these small business could also be paying more than large, publicly traded companies, and more than their true risk requires.

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