In the News

Opinion: 'No' to Basel Endgame Capital Requirements 

by Rep. French Hill
Arkansas Business
September 30, 2024

As the former CEO of Arkansas’ Delta Trust & Bank, I am well aware of how government regulations affect costs for American workers and small businesses. In my view, the Federal Reserve’s Basel III Endgame proposal increasing capital requirements is unnecessary.

This proposal will significantly increase the costs of home, auto and small-business loans in Arkansas, disrupt the thriving financial ecosystem and place Americans at a competitive disadvantage.

American banks are highly interconnected. They lend and borrow from each other through the interbank market and federal funds market. Small banks often partner withlarger institutions to establish borrowing and lending facilities, and small banks seek short-term funding from larger banks through repurchase agreements and credit lines.

A diverse banking sector drives innovation, distributes risk and increases access to capital for small businesses as financial institutions develop sector and regional specializations. Most nations have at most a few dozen banks, the United States has more than 10,000 federally insured financial institutions. The Basel III Endgame will increase consolidation, weaken diversity in the financial system, and undermine a unique strength of the U.S. economy.

First, increasing capital requirements is unnecessary. Current minimum required capital calculations consider the existing stress capital buffer and factor in operational risk under adverse scenarios. Federal Reserve Vice Chair Michael Barr, a chief proponent of the Basel III Endgame’s requirements, stated in June 2023 that, “the banking system remains strong and resilient.”

Second, increasing capital requirements hurts America’s most vulnerable individuals and small businesses. Americans who already face high interest rates and higher prices would see increased costs to secure a mortgage, expand a small business and save for retirement.

Most privately held businesses principally rely on bank borrowing; publicly traded companies can issue debt on public markets. The Basel III Endgame’s requirements make funding more difficult and expensive for private companies, furthering a “two-tiered” credit system, hurting small businesses seeking bank loans relative to public corporations and those large enough for access to private credit markets.

Third, the Basel III Endgame was never supposed to increase bank capital levels. Gold-plating America’s banks undermines the principle of capital neutrality.

The Biden administration is trying to hijack reforms to 2009’s Basel III intended to aid transparency and improve comparability and consistency across banks. Even Europe’s aggressive regulators stuck to the purpose of the Basel III Endgame — devising fixes to improve transparency and compliance.

Former European Central Bank President Mario Draghi, referring to Basel III Endgame reforms, explains, “the focus of the exercise was not to increase capital.” For example, the United Kingdom’s reforms adjusted capital reserves by less than 1%. Conversely, the Federal Reserve is attempting to dramatically increase capital requirements through supplemental rulemaking far beyond the scope and intent of the Basel III Endgame.

The Federal Reserve must withdraw and re-propose its Basel III Endgame reforms entirely rather than continue the misguided process of rewriting Basel III through supplemental rulemaking or a partial re-proposal.