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 represents banks with more than $100 billion in U.S. assets. As our membership comprises the full range of banks covered by the recent Basel proposal, we welcome the opportunity to testify today.
At the end of July, the federal banking agencies jointly proposed the Basel finalization rule that would result in very large increases in capital requirements for U.S. and foreign banks operating in this country. The Bank Policy Institute will be responding to that proposal in comprehensive detail after analyzing its contents and conferring with member banks to gauge its full impact. This testimony will not attempt to present a detailed response ahead of that formal comment letter, but it will instead highlight six of the proposal’s major conceptual and procedural problems and offer a few illustrative examples of where it accordingly goes very badly wrong.
Congressional attention here is vitally important, as this proposed rule would affect every person and every business in the United States if implemented in its proposed form. Congressional attention is further warranted because the agencies’ proposal would constitute a de facto repeal of regulatory tailoring legislation that Congress passed on a bipartisan basis in 2018 through the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155).
First, the proposal has no basis in real-world experience.
The nation’s largest banks have proven themselves highly resilient since implementing a robust package of regulatory reforms following the Global Financial Crisis of 2008-09. The level of tier 1 common equity, the highest quality capital, has increased nearly 3.5 times. Other prudential enhancements since the crisis have further bolstered bank stability: banks hold dramatically more liquid assets, have substantially expanded their risk management functions and have reduced risk across the board. Banks have weathered very large macroeconomic shocks and market turmoil. Benefiting from diversification across both product and geographic lines, they have proven themselves time and again to be amply capitalized.
Further evidence of the adequacy of current capital levels comes from the Federal Reserve’s annual stress test. For 2022, total loss absorbency on the balance sheet of the 33 banks included in the stress tests— equity plus allowances for credit losses and bail-in debt — was in excess of $2.8 trillion, while total net stress losses under that severely adverse scenario were approximately $300 billion. Thus, absorbency was more than nine times net losses predicted under a stress akin to the Global Financial Crisis and resulting Great Recession. This result is consistent with every past outcome of this test. The proposed rule ignores the existence of this test and its consistent results.
To the contrary, at war with history and independent analysis, the proposed rule concludes instead that every bank holding greater than $100 billion in U.S. assets is undercapitalized and, in some cases, significantly undercapitalized—and would require 16 percent more capital, on average, and far more for some banks.
While the proposed rule does not cite the failure of Silicon Valley Bank as a basis for its policies, one might reasonably ask whether that experience suggests that more capital is needed. Silicon Valley Bank, First Republic and a few other smaller banks failed for two reasons: interest rate risk and depositor concentration risk. Those banks incurred large unrealized losses as a result of an unprecedented series of interest rate increases by the Federal Reserve following a historically long period of near zero rates and a failure by bank managers and examiners to anticipate the potential effect. The primary problem with SVB and the other failed banks was a liquidity problem, an extraordinary concentration of their depositor bases that bore no relation to the funding of America’s larger banks.
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