Banks are voicing their opposition to new capital rules that they claim will limit their ability to provide various forms of credit to Americans, including mortgages and small-business loans. However, top bank regulators suggest that there may be some room for relief, albeit to a limited extent.
In recent hearings held by Senate and House committees, regulators like Michael Barr, the Federal Reserve vice chair for supervision, and Martin Gruenberg, chairman of the Federal Deposit Insurance Corp., discussed the “Basel III Endgame.” This pertains to the finalization of global bank capital standards with the goal of avoiding another financial crisis similar to the one experienced in 2008.
One aspect of these standards involves assigning risk weights to different banking activities to determine the amount of capital that lenders must hold. Some banks argue that these weights disproportionately penalize them for loans that are not actually highly risky, ultimately leading them to reduce credit extension for certain individuals.
The impact of these standards is expected to be most significant for large banks such as Bank of America, JPMorgan Chase, and Wells Fargo. It has been estimated that these major banks may need to increase their capital by as much as 20%.
While many Democrats and critics of the banking industry have dismissed the banks’ concerns as an attempt to prioritize profits over taxpayers’ well-being, regulators have suggested that they are open to revising some requirements. The Federal Reserve and other regulators are accepting comments on the proposal until January 16th.
Regarding the matter, Barr stated during his opening remarks to the House Financial Services Committee on Wednesday: “We have already received feedback expressing concerns that the proposed risk-based capital treatment for mortgage lending, tax credit investments, trading activities, and operational risk may overestimate the actual risk associated with these activities.”
Title: Potential Changes Ahead for Basel 3 Endgame Capital Rule
Barr’s Testimony Sparks Hope for Banks
Barr’s recent testimony at the Senate Banking Committee has provided banks with a glimmer of hope that the proposed Basel 3 Endgame capital rule could be altered or possibly withdrawn. TD Cowen policy analyst Jaret Seiberg believes that Barr’s comments reinforce the possibility of the proposal facing significant changes or a complete restart. In a research note, Seiberg stated, “Our view is that regulators either will overhaul it or they will withdraw the proposal and start over.”
Adjustments on the Horizon
While the regulators’ ultimate changes may be limited in scope, adjustments to the treatment of mortgages are a possibility. In response to the proposal, housing advocates argued that the current standards would discourage banks from offering mortgages with low down payments, potentially hindering efforts to increase minority homeownership. Compass Point Research & Trading analysts suggest that a revised proposal may incorporate factors like mortgage insurance to mitigate risks associated with these loans. While this revision would be favorable for low-income borrowers, it may not significantly benefit the banks most impacted by the potential requirements.
Shifting Lending Landscape
While bank lobbyists anticipate a severe restriction in credit availability, it is likely that lenders not affected by the proposal, such as private-equity firms, would pick up the slack. While regulators may be extending an olive branch by considering adjustments, it is essential to note that higher bank capital requirements remain inevitable.