House Subcommittee Focuses on Problems with Basel III

In testimony before the House Financial Services Subcommittee on Financial Institutions, witnesses asserted that the Basel III Endgame proposal threatens the competitiveness of US banks and risks hampering economic growth.

At the hearing titled "Regulatory Recipe for Economic Uncertainty: The Endless Basel Endgame and an Onslaught of Hurried Rulemaking," witnesses argued that the Basel III introduces regulatory capital requirements that could stifle market liquidity and raise borrowing costs for consumers and businesses alike. The panel raised concerns that US banks may lose ground globally due to disproportionate capital hikes compared to international competitors.

Subcommittee Chair Andy Barr called the July 2023 proposal "shockingly under-analyzed" and pointed out that "97% of the comments were negative, and 86% came from stakeholders outside of the banking system." He stated that the proposal "had nothing to do with [interest rate] risk," the issue that had caused the March 2023 bank failures. He further criticized the agencies involved, stating that their "procedures ... continue to be clumsy at best and politicized at worst," leading to "lingering uncertainty about the future rules of the road for financial institutions and consumers of financial services."

Chair Barr also criticized remarks by the Federal Reserve Vice Chair for Supervision who previewed upcoming proposed changes to Basel III. The Subcommittee Chair said, "considerable work still remains, particularly to the market risk component of the Endgame proposal," but no vote had been scheduled on the Fed's proposed revisions as of two weeks after the speech. (See previous coverage.)

The following witnesses testified:

• Kenneth E. Bentsen, Jr., President and CEO of SIFMA, warned that the Basel III would increase capital requirements for banks' market activities by 129%, leading to "knock-on effects for the capital markets and real economy." Mr. Bentsen cautioned that the proposal could "negatively impact the depth, liquidity, and resiliency of the capital markets," with potentially serious consequences for consumers and businesses.​
• Jonathan V. Gould, Partner at Jones Day, highlighted procedural flaws in the rulemaking process. He noted the Fed's failure to release data underpinning the proposal and criticized the lack of transparency. Mr. Gould suggested that the Fed's approach had led to "uncertainty around regulatory capital [that] puts a damper on banks' ability to support real-world economic activities."
• Marc Jarsulic, Chief Economist at the Center for American Progress, supported increased capital requirements, but argued that the proposed measures do not go far enough. He said that recent crises show that "banks of any size can experience double-digit losses," and warned that the proposed Basel III capital levels might still leave the banking system vulnerable to significant shocks similar to those seen during the 2008 financial crisis.