The banking agencies’ Basel capital proposal would impose significant, unjustified and permanent costs on U.S. businesses and consumers and provides no evidence banks hold insufficient capital against the four risks addressed in the proposal.
Washington, D.C. – The Basel capital proposal would impose significant costs on the U.S. economy, ranging from small business loans to the pricing of derivatives that allow businesses to hedge their risks, the Bank Policy Institute and the American Bankers Association argue in a joint comment letter submitted today to federal regulators. The agencies dramatically underestimate these consequences in their proposal and fail to weigh the costs and benefits of their changes. The result is a policy proposal that reduces the availability of credit for main street American businesses, weakens economic growth, punishes diversified banking business models and pushes financing to less stable nonbank intermediaries. Rather than bolstering banks, this proposal makes them less able to do their basic jobs as economic engines and financial intermediaries: pricing loans, extending credit and providing liquidity to financial markets.
“This proposal’s profound consequences for the U.S. economy strike a sharp contrast with the agencies’ inadequate consideration of costs and benefits. On a micro level, the proposal would make small business owners pay more for financing, deprive lower-income customers of vital sources of backup credit and preclude hardworking Americans from buying their first home without a large down payment. On a macro level, the proposed capital charges would permanently cut American economic output and endanger market liquidity. Policymakers should re-propose the rule and consider the costs thoroughly.” – BPI President and CEO Greg Baer
“Despite the old saying, more isn’t always better. These proposed capital increases would dolittle to increase the safety and soundness of our banking system, which regulators and stress tests have confirmed is strong and already well-capitalized. Instead, at a critical moment for our economy, these changes would inflict serious harm on consumers and businesses in every community. First-time mortgage borrowers, farmers, renewable energy companies, retirees and others would see their access to credit shrink and their costs increase under this proposal. Incredibly, regulators have not even attempted to offer a thorough economic analysis of the proposal’s full costs. They have simply failed to make the case and must go back to the drawing board.” – ABA President and CEO Rob Nichols
The problems with the proposal are pervasive and insurmountable without a complete re-proposal. They include:
- An operational risk charge that would impose a tax on all banking activities, at a level that massively overstates banks’ actual operational risk and fails to acknowledge that U.S. banks are already required to capitalize for operational risk through the stress tests.
- Unnecessarily high credit risk weights on mortgage loans, retail loans and small business loans that are unsupported by empirical analysis. Several changes to the credit risk framework would have particularly harmful consequences for smaller firms and lower-income households.
- Restricting the potential for loans to low-risk firms without publicly listed securities to qualify for lower capital requirements.
- Introducing a capital charge on the unused portion of credit card lines that would reduce the availability of such credit, hurting financially fragile customers who rely on credit cards to meet urgent needs.
- Increasing risk weights for mortgages with lower down payments – which disproportionately affect Black and Hispanic borrowers and first-time homebuyers.
- An outsized increase in market risk capital and failure to recognize the substantial overlap between the stress tests and the new framework for market risk. They both assess market risk under extreme stress conditions and over a prolonged period of illiquidity, during which banks are assumed to be unable to hedge or close out positions.
- A backdoor repeal of many of the capital tailoring provisions of the bipartisan Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, which would impose undue costs and burdens on regional banks without a commensurate supervisory or policy benefit.
Legal flaws: The agencies failed to adhere to the Administrative Procedure Act, which sets out requirements for all federal agency rulemaking. The proposed rule’s numerous legal weaknesses include a lack of justification and explanation, reliance on non-public analysis and a failure to fully consider the costs and benefits of the proposal. These deficiencies and others demand a full re-proposal of the rule.¹
Why it matters: The proposal would drive up borrowing costs and reduce the availability of credit and other essential banking services across the U.S. economy. These higher costs would disproportionately affect those who are least able to bear them.
¹BPI submitted a separate comment letter outlining some of the fundamental legal issues on Jan. 12. ABA and 51 state bankers associations submitted a separate letter calling for a re-proposal and highlighting the lack of sufficient data and analysis to justify the increased capital requirements on Jan. 11.
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.
About the American Bankers Association
The American Bankers Association is the voice of the nation’s $23.4 trillion banking industry, which is composed of small, regional and large banks that together employ approximately 2.1 million people, safeguard $18.6 trillion in deposits and extend $12.3 trillion in loans.
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