This article was written by Omar Vasconcelos a Law student at the University of Warwick.
For the past months, the largest American banks have been fighting against a set of laws that regulators are keen on implementing, referred to as the “Basel III endgame”, which are said to bring stability to the economy. While the banks have won some ground so far, having the Federal Reserve reduce its scope, they still want to go further to bring the whole reform project to a full stop.
Basel III gets its name from a small city in Switzerland, where the Basel Committee on Banking Supervision sits. The G10 nations have established regulatory frameworks in Basel since 1988 (Basel I), and its third accord took place two years after the 2008 financial crisis, intending to decrease bank leverage by increasing minimum capital requirements and holdings of high-quality liquid assets (HQLA). The final intent is to make it less likely for banks to fail during a crisis. To put it into perspective, imagine a bank with £100bn in assets (loans, investments, etc.) and £3bn in capital. It can be inferred that the bank has a leverage ratio of 3%, meaning they are using a lot of debt against their capital to fund their activities. Basel III requires banks to have a certain percentage of their assets in HQLA, such as cash and government bonds that can be easily sold in a crisis, and to increase their capital, therefore having less leverage.
While these requirements have been set at certain values since 2010, upon the 2023 failure of the midsized lenders Silicon Valley Bank, Signature Bank, and First Republic, American regulators have been looking at ways to increase them. Last summer, they proposed raising the capital requirements to 19% for banks with assets of $100bn or more, with the so-called “Basel III endgame.”
It is comprehensible that banks did not take it very well, as such measures would reduce profits and make lending more expensive and, therefore, less appellative to borrowers. Jamie Dimon, JP Morgan’s CEO, threatened, ‘If you’re in a knife fight, you better damn well bring a knife’, suggesting that the Big Banks will fight this piece of regulation as much as they can. They have done so by funding Wall Street lobbyists who campaign against Basel III endgame, arguing that it will damage the economy, crimp lending and hit minority communities. Last year, Jamie Dimon testified before the Senate Banking Committee, stating that the proposed changes would not have prevented the failure of the Silicon Valley Bank and would do more harm than good by tanking the economy. The Big Banks also agree that the Fed’s interpretation of the 2010 Basel III rules is even stricter than the global standard, with the UK having a capital requirement of just 3% and the EU standing at 9.9%. Republicans in Congress declared that the three agencies overseeing these changes (the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency) have exceeded their limit and could diminish the competitiveness of US banks by applying measures harsher than those agreed globally.
Under pressure from the banking industry, the Federal Reserve announced a diminished version of its final reform package in September. It revised that it would reduce the capital requirement by 10pp (to 9%) and reduce the number of banks affected by the measure, only being applied to those with assets superior to $250bn. The new rules would also exclude asset management as an operational risk and remove an internal loss multiplier that would adjust lenders’ capital requirements based on past operational losses, significantly relieving the banks.
Michael Hsu, the sitting Comptroller of the Currency, expressed his concerns that this version could lead to a new global banking meltdown and hurt the US’s credibility and leadership in the finance sector, as it is not strict enough. However, Big Banks are still trying to lower the requirements, claiming that having to set more money aside to absorb losses in times of distress will limit their ability to take risks, raising costs and wrecking the US economy. David Solomon, the CEO of Goldman Sachs, said he ‘continue[s] to have concerns’ about Basel III endgame.
While the new proposal would translate into savings of roughly $100bn for the nation’s six largest banks, they are still confident that they could tip the scale on their side, looking forward to the 5th of November Presidential Elections, wherein the scenario of a Republican Party victory, Donald Trump could bring the whole reform into an end.
The views and opinions expressed in this article belong solely to the writer and do not necessarily reflect the views and opinions of the Warwick Economics Summit.
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