Consumer groups, nonbanking sectors and bipartisan legislators have joined the chorus of pushback against the Basel III endgame proposal.
Comments for the Basel III rule proposal flooded in ahead of the Jan. 16 deadline set by the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. As expected, the bank industry put pressure on regulators to scrap the proposal, arguing that it will raise the cost of lending and push customers outside of the banking system, and that higher risk weights would inhibit banks' trading and other activities. But unlikely allies also joined banks in their fight against the proposal, including over two dozen consumer groups, industries such as energy and insurance, and legislators from both sides of the aisle.
Consumer advocacy groups often clash with banks as they push for rule changes that are consumer-friendly but sometimes hurt banks' bottom lines.
But the Bank Policy Institute and Western Alliance Bancorp.'s bank subsidiary teamed up with 25 other signees, including many consumer advocacy groups, to warn that the proposal "will lead to reduced credit availability for all types of real estate buyers and undermine economic growth."
The letter, led by the National Housing Conference, included the NAACP and Habitat for Humanity International as signees.
The National Community Reinvestment Coalition, which has reached numerous community benefit agreements with banks in connection with M&A deals, cautioned in a separate letter that the proposal would undercut homeownership and some community reinvestment activities, such as housing counseling programs and state housing finance agencies' down-payment assistance.
"If risk weightings for high loan-to-value (LTV) mortgage loans held-for-investment increase dramatically, it may make banks more hesitant to extend mortgage loans to the types of borrowers — typically lower-wealth, lower-income, and of color — who make smaller down payments," the coalition wrote in a letter Jan. 15.
Groups from outside the banking sector also joined in asking regulators to rethink the Basel III proposal, fearful that changes to risk weights and capital requirements will harm banks' involvement in their sectors.
Supportive comments from the American Council on Renewable Energy and the Solar Energy Industries Association were part of a letter from more than 100 Democratic lawmakers, who recently urged the regulators to revise the proposal, citing concerns that raising the capital requirements for tax equity investments would drive large banks out of the renewable tax equity market "entirely."
"As written, the proposed rule would make it prohibitively expensive for banks to extend tax equity financing for clean energy project development, which would slow deployment of clean energy generation and manufacturing," the 106 lawmakers wrote in the Dec. 18 letter that was led by Rep. Sean Casten, D-Ill.
In addition to the energy sector, insurance also joined in on the fight. Two trade groups, the American Council of Life Insurers and National Association of Mutual Insurance Companies, expressed concern in separate letters Jan. 16 about the corporate exposures provision, giving non-publicly traded companies a higher risk weight than publicly traded ones.
The National Association of Manufacturers, which represents manufacturers from every industrial sector, called on the regulators to withdraw the proposal, expressing concern that manufacturers will have less access to funding if banks are required to hold more capital.
"The Proposed Rule, if implemented, would have significant adverse consequences for manufacturers of all sizes throughout the U.S.," the organization wrote. "In particular, it would harm smaller manufacturers who lack access to the capital markets and must rely on bank funding, manufacturers who do not have publicly traded securities, and manufacturers who rely on banks to help them manage financial risks."
Legislative, regulatory perspectives
Both Republican and Democratic legislators are also against Basel III in the form it was proposed.
Rep. Andy Barr, R-Ky., chair of the House Financial Services Committee's Financial Institutions and Monetary Policy Subcommittee, said during an event Jan. 17 that the Basel III proposal will lead to increased consolidation as regional banks pair up to better deal with the increased capital requirements. He believes that will create a barbell banking system in the US in which there are no regional banks, only small and large.
Rep. Bill Foster, D-Ill., also expressed concern about industry consolidation leading to less competition in the marketplace, saying during the same event that it can be beneficial for customers to have "multiple banks bidding for" their business.
The agencies are also receiving pressure from within, with Fed Governor Michelle Bowman putting pressure on her fellow regulators in remarks at the same event.
"We should make sure that capital requirements are better aligned with risk for these exposures so that we can avoid imposing unnecessary costs on these types of borrowers," Bowman said. "I do have concerns that an over-calibrated capital charge, for operational risks in particular, would likely result in those costs being passed through to the people and businesses that rely on the financial products and services to continue the operation of their businesses."
Banks fight to the end
As expected, banks pushed back against the proposal in comment letters to the agencies. Even some smaller organizations not subject to the rule, which only applies to banks with more than $100 billion in assets as proposed, are against it.
Jacksonville, Fla.-based Florida Capital Bank NA President and CEO Mark Johnson raised concerns that the proposal has "a potential to stunt overall economic growth" and negatively affect the broader mortgage market, he wrote in a letter to the federal agencies.
"[I]f the objective of the [notice of proposed rulemaking] is to address the increased level of interest rate and liquidity risk posed by tighter monetary policy and irresponsible fiscal policy, then a scalpel approach as opposed to an axe approach may be more appropriate," Johnson wrote in a letter Sept. 13, 2023. "I suggest that with respect to liquidity management, the best place to start would appear to be with meaningful FDIC insurance reform, and not through revisions to existing capital regulations that will negatively impact community banks."
Future of the final rule
Given the chorus of pushback, industry experts believe the agencies must make significant changes in the final rule or face a long implementation timeline full of lawsuits.
"Our base case has been that the Basel 3 Endgame proposal would be softened and finalized in late 2024, but recent developments lead us to believe we are still in the early innings of this battle," Isaac Boltansky, managing director and director of policy research at BTIG LLC, wrote in a note Jan. 20. "Furthermore, we now think that total tonnage of procedural and substantive issues with the proposal could lead to a re-proposal, which would surely push this effort into 2025. At a minimum, we continue to expect targeted tweaks to how the proposal treats mortgages, green tax credit investments, fee-based income such as swipe fees, corporate loans, and trading activities."
Ed Mills, managing director of Washington policy at Raymond James & Associates, predicted the Fed's next vote on the rule will take place in the second half of the year, possibly after the election.
"The comment letters raise substantive concerns that could easily gain traction with an increasingly skeptical federal judiciary on regulatory overreach," Mills wrote in a note Jan. 16. "These lawsuits could easily take years to resolve and delay implementation."