BPI CEO Testifies Before House Subcommittee on Basel Endgame Capital Proposal

Chairman Barr, Ranking Member Foster, and members of the Subcommittee, thank you for the invitation to testify today. My name is Greg Baer, and I am the CEO of the Bank Policy Institute, which is a research and advocacy group supported by banks with more than $100 billion in U.S. assets. As our membership comprises the full range of banks covered by the recent capital proposal, I welcome the opportunity to testify today.

Our comment letters to the banking agencies set forth our concerns and suggestions for improvement in considerable detail.[1] Today, I will attempt to summarize them.

Overview

If adopted, the capital rule proposed by the federal banking agencies would have a profound effect on the availability and cost of credit for nearly every American business and consumer, as well as on the resiliency of U.S. capital markets. The U.S. economy would suffer a significant, permanent reduction in GDP and employment; U.S. capital markets would become less liquid and therefore more dependent on non-bank intermediation in normal times and on governmental support when those non-banks step away during times of stress. Given the stakes involved, the proposal is remarkable for its lack of analytical rigor, its hostility to the use of relevant data as opposed to pre-formed opinions, and its failure to consider both its costs and benefits, not just to banks but to all corners of the U.S. economy.

At a macro level, the proposal contains no standard by which to determine what an appropriate risk weight should be for the risks it proposes to capitalize, and therefore makes it impossible to determine whether a proposed risk weight is too high or too low or whether the costs of higher capital outweigh the benefits. This marks a departure from prior practice.

At a micro level, in almost every case the proposed risk weight for a given asset is based on no identified data or historical experience and no economic analysis. In most cases, the proposal simply takes as given the risk weights negotiated by agency staff in Basel in 2017 and 2019, which, in turn, are lacking in data or analysis, or at least any that has been made public.

Also, in many cases, the agencies not only take Basel risk weights as a baseline for the proposal, but also add arbitrary surcharges on top of the Basel weights, again with very little explanation. Finally, the proposal fails completely to acknowledge that in the United States, and in the United States alone, a stress capital charge for most of the same risks is already imposed by the Federal Reserve through its stress testing process.

To read the full congressional letter, click here or the download button below.


[1] Comment Letter from the Bank Policy Institute and American Bankers Association (Jan. 16, 2024), available at https://bpi.com/wp-content/uploads/2024/01/ABA-BPI-Basel-III-Endgame-Comment-Letter-Final- 2024.01.16.pdf [hereinafter BPI/ABA Letter]
The proposal ignores massive data