Industry Associations Dispute Justification for Basel Proposal
Commentary by Steven Lofchie
The American Bankers Association, the Bank Policy Institute, the Financial Services Forum, the Institute of International Bankers and SIFMA (collectively, the "Associations") countered the arguments made by Federal Reserve Board ("FRB") Vice Chair Michael S. Barr in support of a proposal to implement the Basel agreement (see previous coverage).
In a Letter addressed to FRB Chair Jerome H. Powell, the Associations warned that the proposed rule would have a potentially "profound effect on the U.S. banking system and U.S. capital markets," and would have a "direct impact on the ability and cost of businesses and individuals to obtain credit and capital and manage business risks." The Associations enumerated their disagreements with Mr. Barr's speech. They:
- derided Mr. Barr's description of the process leading to the proposal as constituting a "holistic review," saying no records of the review had been provided and there was no evidence that the bank regulators had considered the impact of the capital framework with other prudential regulations;
- directly disputed Mr. Barr's assertion that "there was consensus among the Basel jurisdictions that current rules underestimate the risks" created by large banks, stating that the "largest U.S. banks are well capitalized and have been a source of strength" to the U.S. economy;
- stated that Mr. Barr's remarks failed to account for the associated costs of the proposal; and
- asserted that "the record clearly shows" that the intent of the 2017 Basel agreement was to "avoid increasing capital for large banks generally" and "reduce regulatory capital variability, and level the playing field among internationally active banks."
The Associations also urged Mr. Powell to allow a 120-day comment period on the proposed rule.
Commentary
This was not a gently worded letter. It basically states that the premises of Mr. Barr's remarks were completely incorrect. Putting Mr. Barr's description of the plan as resulting from a "holistic review" in quotes, the letter came about as close to being completely dismissive as one is likely to see in a comment letter to the regulators.
One wonders how the recent bank failures will impact the politics of the proposal. Those failures -- caused by poor management at the individual banks, regulatory laxity, and a failure to account for losses caused by inflation -- are not the targets of the proposal.