Democrats Stuck Defending Poorly-Timed Basel III Proposed Regulations

It is unclear what Chairman Sherrod Brown hoped to achieve when he convened a hearing with the eight CEOs of the largest banking institutions in the U.S. on Wednesday, Dec. 6. What he got wasn’t hard to predict—a well-choreographed lobbying campaign against the proposed Basel III ‘Endgame’ regulations that are set to be finalized next year. While Chairman Brown and a few Democrats tried to defend the new regulations, the coordinated attack from sympathetic Republican Senators was echoed by every single CEO testifying and dominated Wednesday’s hearing.

An obscure international standard setting Committee, the Basel Committee on Banking Supervision–named after Basel, Switzerland where the group meets—was established in 1975 in response to currency and bank failures that shocked the global economic market. Its mission is to help protect global financial market stability by identifying and suggesting a standardized regulatory and supervisory regime for national regulatory to consider and adopt.

Basel III Endgame is the final wave of regulatory changes across the U.S. financial system that are intended to bring U.S. regulations in line with Basel III recommendations. The most talked about aspects of the proposed regulations include increased capital requirements for large banks, with the amount of that increase being dependent on the “riskiness” of its business portfolio. On average, it is expected to require banks to hold 15-20% more capital.

The message from the banking industry is unanimous—increased capital requirements will result in higher interest rates for consumers and less access to consumer and small business credit. No one argues that this is a natural result of forcing banks to hold more cash. What is in debate is just how much. Proponents of the rule say that it will increase interest rates by an average of .03%. Opponents say that this is just a guess and that comprehensive economic analyses have not been conducted on the actual impacts of implementing Basel III Endgame as written; they argue that the real impacts on consumers will be much more severe.

The timing on this proposal couldn’t be worse. Consumer confidence in the economy is still low, with most consumers believing that there will be a recession within the next year. Interest rates are still very high and while inflation is back down to around 3.1% year-over-year, consumers are still reeling from price increases as a result of last year’s 7-8% inflation rates.

Opponents of the Basel III Endgame regulations are leveraging this public sentiment to generate significant opposition to the rule through a robust lobbying and public affairs campaign. While regulators have the recent failures of SVB and First Republic on their side, it’s highly unlikely that the regulations could have saved either bank, and opponents are quick to point that out.

During the hearing, Chairman Sherrod Brown, a Democrat, asked the CEOs whether they would be unable to meet the capital requirements of Basel III through a show of hands, to which not a single CEO raised their hand. He concluded based on this that clearly banks are capable of meeting the requirements, that they are not onerous, and that banks are just trying to protect their bottom line.

Later on, after calling out how one-sided it is to ask witnesses to answer questions with just the raising of a hand, Senator Rounds (R-SD) asked the CEOs to do the same to his series of questions. He asked whether the proposed Basel III regulations could negatively impact: first time homebuyers, those saving for retirement, farmers and ranchers, and small business owners. In each instance, the witnesses all raised their hands. Of course, none of those answers really meant anything either, as each question was posed as a ‘could’.

All-in-all, pretty typical for a hearing on Capitol Hill.

Next year officially marks the beginning of the 2024 Presidential elections at a time when Democrats are on defense on economic issues. Given all of this, it is hard to see the Basel III Endgame regulations implemented in the same form in which they were proposed earlier this year. Even if they are, we probably won’t see the economic impacts of the new regulations for several years, as the proposed regulations already include a 3-year phased implementation schedule.

In closing, while we wait for the chips to fall, despite rhetoric on both sides, it is hard to see any immediate or even short-term impacts of the new regulations within the next year or two. Where the impacts may be felt are in the event of a recession several years down the line and banks find themselves less well capitalized leading to consumers and small businesses seeing their lending products eliminated or more expensive as a result.