Basel Proposal is a Step in the Right Direction

WASHINGTON, D.C. - The banking agencies' Basel capital proposal is an improvement from the 2023 proposal, but changes that eliminate areas of overcapitalization and better align capital charges with risk are needed, the Consumer Bankers Association and other trade associations said in a comment letter today. The letter was signed by the Consumer Bankers Association, the American Bankers Association, the Bank Policy Institute, the Financial Services Forum, and the U.S. Chamber of Commerce.

The joint trades issued the following statement upon filing the letter:

"This proposal represents a significant improvement over the previous version. It takes a big-picture view of the capital framework, seeks to simplify the framework's design and better aligns capital requirements with risk. The depth of its supporting economic analysis is also a welcome step forward. However, some overlapping requirements remain, leading to excessive capital charges for certain risks. Our recommended changes would further improve risk sensitivity and reduce unnecessary complexity, advancing the proposal's stated goals. The changes will ultimately benefit bank customers and the economy while promoting a sound banking system."

Context

The current Basel proposal culminates more than a decade of work to standardize bank capital requirements after the Global Financial Crisis. During that time, banks have accumulated robust capital levels and become subject to stringent regulatory mandates.

The 2023 Basel proposal garnered bipartisan, widespread opposition, with 97 percent of commenters objecting or expressing major concern. It proposed arbitrarily high capital charges disproportionate to the risk of certain assets, failed to justify its calibration with economic analysis and failed to consider overlaps with the stress tests or gold-plating in the U.S. capital framework.

Overly high capital requirements harm economic growth. A review of the academic literature by the Basel Committee on Banking Supervision found that a 1-percentage-point increase in capital requirements reduces annual GDP by up to 16 basis points. This equates to a loss of about $42 billion in U.S. output per year.

Recommendations

• Mitigate Overlaps.
  • Mitigate the overlap between the stress capital buffer and the proposal in terms of operational risk by applying a uniform 12 percent business indicator coefficient.
  • Revise the market risk and credit valuation adjustment frameworks to resolve the over-calibration for these risks resulting from the overlap between the stress test and the proposal.
• Eliminate Newly Introduced Ambiguity.
  • Retain the current definition of the terms "commitment" and "unconditionally cancelable." The proposed "clarification" to these definitions is ambiguous, would introduce significant additional uncertainty into the capital framework and would result in an unquantifiable and unanalyzed increase in capital requirements. This uncertainty could have a negative effect on business lending.
• Encourage Banks' Participation in the Mortgage Market.
  • Reduce the risk weight for appropriately hedged mortgage servicing assets from 250 percent to 100 percent.
• Consider Implementation Timing.
  • Impose a required implementation date of no earlier than Jan. 1, 2028, allowing sufficient time for banks to implement the requirements, while allowing banks to adopt it earlier.
  • Consider interactions and timing implications between the effective date of the proposal and the forthcoming stress test rule.