What is the final phase of Basel III and why are banks so upset about it?

An unlikely coalition of banks, community groups and racial justice advocates is urging federal regulators to rethink the plan they proposed in July to update rules governing how U.S. banks protect themselves against potential losses .

Regulators are calling for an increase in the amount of capital – cash-like assets – that banks must hold to deal with an emergency and avoid the need for a taxpayer-funded bailout like in the financial crisis of 2008. The collapse of three mid-sized banks and a fourth smaller bank last year, under pressure from rising interest rates and losses in cryptocurrency businesses, strengthened sentiment regulators that additional capital is needed. Financial regulators around the world, including in the European Union and Britain, are adopting similar standards.

Banks have long complained that holding too much capital forces them to be less competitive and restrict lending, which could hurt economic growth. What’s interesting about the latest proposal is that groups not traditionally aligned with banks are joining the criticism. They include pension funds, green energy groups and others concerned about the economic ramifications.

“It’s the biblical dynamic: Capital rises, banks scream,” said Isaac Boltansky, an analyst at brokerage BTIG. “But this time it’s a little different.”

On Tuesday, the last day of the month-long period in which members of the public could provide feedback to regulators on the proposal, bank lobbyists made a renewed push to have it scrapped. While there’s no indication regulators will withdraw the proposal altogether, the deluge of complaints about it will likely force them to make big changes before it becomes final.

The Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency — the agencies that will determine the final rules — want to synchronize U.S. standards with those developed by the Basel International Committee on Banking Supervision. The committee has no direct regulatory authority, but regulators follow its directives in the hope that agreement on how much capital big banks around the world should hold will help avert a crisis.

The new capital rules would only apply to institutions with assets of $100 billion or more, including 37 holding companies for U.S. and foreign banks. Some rules are even more narrowly tailored to institutions so large that regulators consider them systemically important. Regulators and financial industry stakeholders call these rules “Basel III final” because they are an attempt by the U.S. government to implement a 2017 proposal from the Basel Committee called Basel III.

If a version of the proposed U.S. plan is completed this year, the rules would take effect in July 2025 and be fully operational by 2028.

Banks have long complained about having to hold more capital to offset the risks posed by lending, business operations and other daily activities. They also oppose the latest 1,087-page plan. Industry efforts to defeat the proposal have included websites such as americanscantaffordit.com and stopbaselendgame.coma steady stream of investigative documents detailing the plan’s failures, influencing campaigns on Capitol Hill and even threats to sue regulators.

On Tuesday, two advocacy groups, the American Bankers Association and the Bank Policy Institute, filed a comment letter of more than 300 pages, listing ways the proposed rules could push lending activity into the shadow banking sector, reduce market liquidity and cause “a significant and permanent reduction in GDP and employment.”

Banks are particularly angered by a proposal to guard against the risks posed by mortgages. This option – one of several proposed in the plan but which has attracted the most attention – would require them to pay more attention to the characteristics of each loan and, in some cases, assign loans a significantly higher risk score. higher than they currently do.

They say the rule could lead them to stop lending to borrowers they don’t consider safe enough. This could hurt first-time homebuyers and those without stable banking relationships, including Black Americans, who regularly face racism from the banking industry.

Banks also say the rules would make it harder for private companies to get loans by forcing them to view them as riskier borrowers than public companies, which must disclose more financial information. Banks say many private companies are as safe as some public companies, or even safer, even though they are not subject to the same financial reporting requirements.

a few Liberal Democrats to Congress and nonprofit organizations dedicated to closing the racial wealth gap are concerned about the plan’s treatment of mortgages. Others say parts of the proposal could harm renewable energy development by removing tax breaks intended to finance green energy projects.

The National Community Reinvestment Coalition, which is pushing banks to do more business in predominantly black and Hispanic neighborhoods where banks often have little presence, warned that parts of the proposal “overly aggressive capital requirements are likely to making mortgages much more expensive for the less wealthy.” populations.”

Pension funds, which would be considered private rather than public companies under parts of the proposal, say it would force banks to unfairly treat them as riskier financial market participants than they really are.

There is no doubt that the regulators’ final proposal, if they publish one, will be different from the July proposal.

“We want to make sure the rule supports a vibrant economy, that it supports low- and moderate-income communities, that it’s properly calibrated on things like mortgages,” said Michael S. Barr, vice chairman. of the Fed responsible for supervision. Jan. 9 at a financial industry event in Washington. “The public feedback we receive on this is really critical to us being able to do this.” “We take this very, very seriously.”

Most observers believe criticism of the plan will force regulators to make substantial changes. But not everyone agrees that the future under the new rules is so bleak. Americans for Financial Reform, a progressive policy group, argued in its comment letter, which broadly praised the proposal, that research shows that banks lent more — not less …when they had more capital in reserve.

Still, “there are more complaints about this from more groups than there usually are,” said Ian Katz, an analyst at Capital Alpha who covers banking regulation.

That could mean banks are really on the right track this time around, even if their warnings about economic woes sound familiar. But, Mr. Katz said, the future is less predictable than banks suggest. While some may shy away from lending under tighter capital rules, others may see an opportunity to increase their market share in the absence of erstwhile competitors.

“We don’t know how individual businesses would respond to this final rule,” he said.