What Happened: On Monday, June 17th, Senator Elizabeth Warren sent a letter to Federal Reserve Board (Fed) Chair Powell calling for Basel III Endgame (the “Proposal”) to be finalized without any changes to the Proposal. Senator Warren implied that the 16% capital requirement increase would not present a substantial cost to banks or their customers. Respectfully, Senator Warren is wrong.
Our View: Research from the Basel Committee on Banking Supervision – the body that devised the new capital standards – has shown that more stringent bank regulations make bank credit more expensive for borrowers. There’s no dispute that capital is important to maintaining a healthy banking system. However, like medicine, too much can make the patient sicker. Multiple studies and reports, from the Urban Institute’s report on affordable housing, to ACORE's report on renewable energy investment to our own white paper, have shown that the Proposal likely would reverberate through every sector of the economy.
Where is the Fed’s Quantitative Impact Study? The Fed waited until after the Proposal was published to conduct a Quantitative Impact Study (QIS) studying the economic impacts of the steep capital increases. The QIS has still not been released six months after the comment period closed on the Proposal. As stated in our letter to the Fed in March, we are eager to see if the findings of the QIS justify such a significant capital increase.
Additionally, Senator Warren makes a false equivalence between the bank failures of 2023 and the need for Basel III Endgame. The proposed capital requirement increases would not have prevented the failures of Signature Bank and First Republic Bank. Those banks failed because management failed to anticipate interest rate risk and the banks lacked sufficient liquidity. In fact, banking regulators cited that Signature Bank and First Republic Bank were well-capitalized.
Public Input: According to a Latham & Watkins analysis , more than 97% of comments on the Proposal were negative. In fact, more than 100 state and local Chambers of Commerce wrote to President Biden expressing concern with the Proposal and underscoring a survey finding that 68%of business owners believe that a net increase in bank capital requirements could be detrimental to their business.
Bottom Line: It’s clear that the Fed has not justified why the capital increases are appropriate or properly calibrated. Studying costs to consumers, small businesses, and the real economy is not placating big banks – as courts have held—it's required by law.
What’s Next: Chair Powell will testify before Congress on July 9 and 10. We look forward to a further update on the status of Basel III Endgame and hope there will be a robust discussion of the proposal's potential pitfalls.
