What are the Basel III rules?
The Basel III rules are a set of international standards for bank capital, leverage and liquidity that were agreed by the Basel Committee on Banking Supervision after the 2008 global financial crisis. The rules aim to ensure that banks have enough financial resources to withstand economic shocks and prevent another systemic meltdown.
The Basel III rules have been gradually implemented by regulators around the world over the past decade, and the final phase, known as the “Basel III endgame”, is expected to take effect in 2023. The endgame proposal includes several changes to how banks measure and manage the risks of their assets, such as loans, securities and derivatives.
Why are Wall Street CEOs opposed to the rules?
On Wednesday, December 6, 2023, the CEOs of six major U.S. banks – JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo – testified before the Senate Banking Committee, chaired by Senator Sherrod Brown, a Democrat from Ohio. The bank executives expressed their concerns about the potential impact of the Basel III endgame rules on the U.S. economy, especially on small businesses, low-income households and financial innovation.
The CEOs argued that the U.S. regulators’ proposal, which was unveiled in July, deviates from the international Basel framework and imposes higher capital requirements on U.S. banks than their foreign competitors. They claimed that this would reduce their ability to lend, invest and trade, and ultimately hurt economic growth and job creation.
They also warned that the rules would create unintended consequences, such as pushing more banking activities into less regulated sectors, increasing the cost and complexity of compliance, and discouraging innovation and risk management. They urged the regulators to reconsider the proposal and align it with the global standards.
How did the regulators and lawmakers respond?
The U.S. regulators, including the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, have defended the Basel III endgame proposal, saying that it would enhance the resilience and safety of the U.S. banking system. They have also said that the proposal is consistent with the international Basel framework, but reflects the specific characteristics and risks of the U.S. market.
The regulators have also pointed out that the U.S. banks are well capitalized and profitable, and that the Basel III endgame rules would not have a significant impact on their lending capacity or competitiveness. They have said that they are open to feedback and dialogue with the industry and other stakeholders, and that they will conduct a thorough analysis of the costs and benefits of the rules before finalizing them.
The lawmakers, meanwhile, have expressed mixed views on the Basel III endgame rules. Some Democrats, such as Senator Brown, have supported the regulators’ proposal, saying that it would protect taxpayers and consumers from another financial crisis. They have also criticized the Wall Street CEOs for complaining about the rules, while benefiting from the government’s pandemic relief programs and paying out billions of dollars in dividends and bonuses.
Some Republicans, on the other hand, have sided with the bank executives, saying that the rules would harm the U.S. economy and give an unfair advantage to foreign banks. They have also questioned the regulators’ authority and transparency in implementing the rules, and called for more congressional oversight and input.
What are the next steps?
The Basel III endgame rules are still in the proposal stage, and the regulators have not yet set a date for finalizing them. The regulators have said that they will consider the comments and feedback from the public and the industry, and that they will conduct a quantitative impact study to assess the effects of the rules on the U.S. banks and the economy.
The regulators have also said that they will coordinate with their international counterparts to ensure a consistent and level playing field for the global banking system. The Basel Committee has set a deadline of January 1, 2023, for the implementation of the Basel III endgame rules, but some countries, such as the European Union and the United Kingdom, have already announced delays due to the COVID-19 pandemic.
The U.S. banks, meanwhile, have said that they will continue to engage with the regulators and the lawmakers, and that they will prepare for the possible changes in their capital and risk management practices. The banks have also said that they will remain committed to supporting the U.S. economy and serving their customers and communities.
