Basel Endgame’s Impact on American Consumers

The proposed “Basel Endgame” rulemaking from the U.S. banking regulators (Federal Reserve, FDIC and OCC) would significantly increase capital requirements on large banks operating in the U.S. which would, in turn, impose real costs on everyday Americans.  Raising bank capital requirements will limit banks’ ability to offer things like mortgages, car loans and credit cards at attractive rates, and will drive more of these activities to more expensive and less regulated nonbanks.  Banks affected by this proposal currently offer $1.76 trillion in loans to households for things like auto loans and credit cards.

Higher Costs for Homebuyers Who Can’t Afford a Down Payment or 20% Or More

The proposal greatly increases capital for mortgage borrowers in the U.S., especially those who are unable to put more than 20% down on their mortgage.  This group is largely comprised of low- and moderate-income (LMI) borrowers and first-time homebuyers, which are those borrowers already most affected in this market by rising prices and interest rates.  The proposal would also require banks to hold significantly more capital for all mortgage loans than what was agreed to in the original Basel framework and also require more capital to be set aside for mortgages that are subsequently sold to government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, further straining mortgage costs for first time homebuyers or underserved borrowers (such as VA loans) despite the existence of government programs designed to improve housing affordability. 

In addition to requiring banks to hold more capital against individual mortgages, the proposal would also impose new operational risk capital requirements on banks that specialize in mortgage origination and rely on that fee income, which will make it more expensive for banks to continue participating heavily in mortgage originations and likely drive more of this activity to nonbanks that are less likely to continue making loans during economic downturns.

According to the NAACP and National Urban League, “If these standards are adopted, they will have a devastating impact on our efforts to increase Black homeownership and disadvantage first-time, and, in particular, first-generation homebuyers who do not have the benefit of multi-generational wealth or higher-than-average incomes.”

Lower Credit Card Limits and Cuts in HELOC Lines, Leading To Lower FICO Scores and Less Availability of Credit and at Higher Costs

The proposed rulemaking would, for the first time, require banks to set aside capital for unused portions of credit lines that they can cancel for any reason, meaning banks would incur a capital charge merely for increasing consumer credit limits.  As a result, banks would be less able to extend or increase credit card limits and home equity lines of credit (HELOCs).  Since credit utilization rates factor into FICO scores, a reduction in credit availability would subsequently reduce FICO scores and result in increased borrowing costs for consumers looking to obtain a mortgage or seek an auto loan.  Additionally, consumers facing a lower line of credit may have to open additional lines of credit to meet their financial needs, which could additionally affect their FICO score or result in more costly credit options. 

Net Impact: Bad for American Consumers

Due to the impact the proposed Basel rulemaking will have on the U.S. economy and American families and households, Congress must urge the Federal Reserve and other financial regulators to withdraw this rulemaking and carefully consider the costs of higher capital requirements before re-proposing a more sensible rule.

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The Bank Policy Institute (BPI) is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation’s small business loans, and are an engine for financial innovation and economic growth.

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