The banking agencies’ Basel capital proposal breaches requirements of the Administrative Procedure Act, which sets clear standards for federal agency rulemaking
Washington, D.C. – The banking agencies’ Basel capital proposal violates both the substantive and procedural requirements of the law that governs all federal agency rulemaking, BPI said in a joint comment letter submitted today. The proposal assigns risk weights to bank assets and exposures generally based on no data or analysis; ignores voluminous data on loss experience held by the agencies and the private sector that could have informed an accurate calibration; fails to consider alternative, more accurate measures of risk, including some negotiated by agency staff at Basel; and ignores altogether a duplicative capital charge imposed by the Federal Reserve through its annual stress test. The only solution to its fatal substantive and procedural flaws is for the agencies to re-propose the rule.
“The proposed rule violates both the spirit and the letter of federal law. In most places it lacks evidence; in others, it ignores what evidence is available; it treats as a binding treaty an agreement negotiated by agency staff that was never reviewed by the Congress, yet even then arbitrarily departs from that agreement to impose still higher capital charges on U.S. banks. By failing to show their work, and failing to consider important parts of the problem, the agencies have prevented meaningful comment not only by banks directly affected by the proposal but also by consumers, businesses and financial market participants who will see real costs as a result.” – BPI President and CEO Greg Baer
The proposal’s fundamental legal problems include:
- Risk weights for bank assets – such as mortgages and small business loans – untethered to an objective standard and unsupported by empirical evidence or analysis.
- An operational risk charge likewise grounded in no objective standard and based on unfounded assumptions about the risks of certain business activities and the nature of operational risk.
- Elimination of the role of bank internal models in calculating credit risk without appropriate justification, even though they are more accurate and granular than government models.
- The unjustified punitive capital treatment of bank lending to smaller businesses that are not publicly traded companies.
- Reliance on opaque data and analyses to calibrate the capital requirements for operational, market and credit valuation adjustment risks without making such data and analyses available for public comment.
- Disparate treatment of the international Basel agreement – in some aspects, the banking agencies copy the Basel agreement without any independent analysis, and in others they deviate from it without explanation.
- Missing the big picture: The proposal fails to account for the complex confluence of different elements of the capital regime and the impact to the broader regulatory and market landscape, such as capital requirements that duplicate those in the stress tests or subjecting different banks to different capital requirements for identical loans and activities. It also fails to consider the costs to society from driving more lending and intermediation to nonbank financial firms.
- Contradicting reality: The proposed rule rests on paltry economic analysis that is inconsistent with available evidence, and it would significantly increase large banks’ capital requirements despite evidence that their current requirements are more than adequate.
- The Federal Reserve’s stress tests continue to show that banks can weather a disastrous economic downturn.
- A review of the academic literature demonstrates that banks’ capital falls in the middle of the range considered “optimal.”
Bottom line: The Basel proposal amounts to a tax on economic growth and essential banking products and services without the evidence, transparency and justification that a federal rulemaking requires. The agencies should re-propose the rule and follow the law by gathering rigorous evidence to justify their proposed charges.
About Bank Policy Institute
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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