Middle Ground Found in Controversial Capital Requirements for Banks

Washington, D.C., March 24, 2021 - In the wake of the recently concluded comment period on the proposed capital requirements for banks, Federal Reserve governor Michelle W. Bowman expressed optimism about finding a middle ground. Speaking at the U.S. Chamber of Commerce, Bowman highlighted the need for policymakers to address the shortcomings of the proposal, particularly its higher capital requirements.

Bowman emphasized that the current iteration of the proposal, known as Basel III endgame, surpasses internationally agreed-upon standards. She cautioned that implementing these initial capital requirements could have severe repercussions for the U.S. economy without achieving the intended goals of enhancing safety and soundness and promoting financial stability.

To create a more effective and efficient set of Basel capital reforms, Bowman recommended a more tailored approach to capital requirements based on the size of banks. Rather than applying a broad set of rules once banks reach $100 billion in assets, regulators should consider adjusting requirements according to individual bank profiles.

While acknowledging the varying perspectives among policymakers on striking the right balance in bank capital policy, Bowman remained positive about overcoming these differences. She believed that these divergent views should not pose insurmountable obstacles to establishing improved reforms.

Ian Katz, an analyst with Capital Alpha Partners, speculated that regulators are unlikely to withdraw the Basel III endgame proposal entirely. However, he anticipates significant changes in response to industry feedback.

Further insight into the regulatory direction is expected in a speech by Michael Hsu, the head of the Office of the Comptroller of the Currency, scheduled for Thursday.

Meanwhile, the Bank Policy Institute and the American Bankers Association jointly submitted a comprehensive 314-page comment letter. In their letter, they asserted that implementing the proposal amidst the macroeconomic challenges of the past year would detrimentally impact the U.S. economy.

The Impact of Proposed Bank Capital Rules on the American Economy

Several banking groups have voiced their concerns over the proposed bank capital rules, highlighting the potential detrimental effects on various sectors of the American economy. The increased capital requirements outlined in the proposal are expected to force banks out of certain business lines, resulting in higher prices and fees for consumers and reduced access to capital markets for businesses. This could ultimately impact consumers, small businesses, pension funds, and even smaller banks not subject to the proposal.

While the Federal Reserve's Vice Chair for Supervision, Michael Barr, has shown willingness to make changes to the proposal, industry experts believe that a lawsuit may be inevitable. Additionally, the outcome of the upcoming presidential election could lead to a reversal of these rules if a Republican candidate is elected.

Fed governor Christopher Waller has voiced his opposition to the proposal, citing major problems with its intent and potential impact. He believes that the original goal of harmonizing global regulations has not been achieved, and that the proposal could impede capital-market functioning. Waller suggests pulling back on the proposal to further examine and refine it before implementing any changes.

It remains uncertain whether these new bank capital rules will ever go into effect, as they face opposition from various stakeholders within the banking industry and potential changes in leadership.

Also read: Fed community-bank advocate Michelle Bowman says proposed bank reforms go beyond what the law intends

Greg Robb contributed.