BPI and Coalition of Trades Call on Regulators to Conduct Full, Public Study on Basel Proposal

Ladies and Gentlemen:

The Bank Policy Institute, the American Bankers Association, the Financial Services Forum, the Institute of International Bankers, the Securities Industry and Financial Markets Association, and the U.S. Chamber of Commerce1 are writing with respect to your agencies’ jointly proposed rulemaking that would amend the capital requirements applicable to large banking organizations, and in particular to the agencies’ promised “quantitative impact study” of the proposal’s effects on bank capital requirements.

As the agencies have clearly acknowledged,2 this data collection and analysis is necessary to fully understand how much capital the proposed rule’s revised risk weights and other changes would require covered banks to hold, and thus is an essential prerequisite to the agencies properly and accurately weighing the relative costs and benefits of each aspect of the proposed rule and the rule as a whole.3

Indeed, the agencies state in the preamble to the proposed rule that the preliminary impact estimates the agencies included with the proposal suffer from at least three severe limitations:

First, these estimates heavily rely on banking organizations’ Basel III QIS submissions. The Basel III QIS was conducted before the introduction of a U.S. notice of proposed rulemaking, and therefore is based on banking organizations’ assumptions on how the Basel III reforms would be implemented in the United States. For market risk, the impact of the proposal further depends on banking organizations’ assumptions on the degree to which they will pursue the internal models versus the standardized approach and their success in obtaining approval for modeling.

Second, for banking organizations that do not participate in Basel III monitoring exercises, the agencies’ estimates are primarily based on banking organizations’ regulatory filings, which do not include sufficient granularity for precise estimates. In cases where the proposed capital requirements are difficult to calculate because there is no formula to apply (in particular, the proposed market risk rule revisions), impact estimates are based on projections of the other banking organizations that submitted QIS reports.

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1    See Appendix for more information on the Associations.

2       For example, the staff memorandum provided to the Board of Governors requesting approving of the proposal stated, “To refine the estimates of the effect of the proposals on capital requirements, staff expects to undertake a data collection following issuance of the proposal. Information gathered through this data collection would inform finalization of the rule.” At the Board meeting where the proposal was discussed and approved, multiple staff members described the need for the data collection, stating at various points: “Following issuance of the proposal, staff plans to undertake a data collection. Such data collection would allow us to refine our estimates of the impact of the proposal. This information will inform finalization of the rule”; “There’s a very important trade-off between the benefit of increased resilience and the potential costs of having very strong capital requirements for all large firms. For that reason, we are going out and actively seeking comment on all aspects of the proposal . . . [and] we’re also doing this additional data collection, which is not always something we do with every rulemaking. It is planned to be a fairly robust data collection, and that will really help us ensure that what we have proposed, whether or not that appropriately captures the risks of large firms’ activities or if recalibration may be needed”; “And I would just emphasize and go back to the data collection that we are planning. So, the idea of trying to get estimates of the increases in capital for specific trading areas and sort of views from the industry and the public for particular areas where there might be a disproportionate impact would be certainly an emphasis that we would be looking to analyze subsequent to that data collection.” The Board’s Vice Chair for Supervision stated to the Board at the meeting: “We also intend to collect additional data to refine our estimates of the rule’s effects.”

3     While necessary, the data collection described by the agencies is not sufficient in scope to remediate all procedural concerns with the rule.