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The chair of the world’s banking watchdog has said he supports US proposals to impose more stringent requirements on banks than their UK and EU counterparts that have met with fierce opposition from Wall Street.
“What is on the table is full implementation of Basel III,” Pablo Hernández de Cos, chair of the Basel Committee on Banking Supervision and governor of the Bank of Spain told the FT of the US proposals to adopt the final stage of the global financial reforms aimed at plugging holes exposed by the crisis of 2008. “By their very nature Basel agreements only set minimum regulatory standards.”
US regulators predict that the new rules, which are designed to restrict banks’ freedom to artificially reduce how much capital they need to hold, would drive a 16 per cent increase in banks’ capital requirements. In the EU, the increased capital demand is billed at around 9 per cent, while in the UK the impact is expected to be just 3 per cent.
“If any jurisdiction thinks that for its own banking sector the implementation of Basel III is not enough in order to reach the same degree of assurance of financial stability, then it’s absolutely justified to go beyond the minimum requirements,” de Cos said. “And that not only is acceptable; I would say that it is needed.”
The main difference between the US and other jurisdictions is the American proposal to prevent banks from using their own internal models to work out how much capital they need to hold against their loan books.
Instead, banks would have to rely on more traditional, standardised assumptions that measure how risky assets are by using credit ratings from agencies.
Wall Street claims such a move will lower US growth and employment and put banks at a competitive disadvantage internationally as they are forced to restrict lending.
The global plans, designed by regulators and central banks representing 28 of the world’s most powerful economies, were originally due to come into force in 2022 and are now expected to come into force in January 2025 in the EU and the UK. The US, which closed a consultation into its proposals on Tuesday, has announced a July 2025 start date.
De Cos said he did not think the US proposals undermined the Basel Committee’s decision to maintain internal models for loan books more broadly. “The international agreement already foresees that jurisdictions which opt to implement only standardised approaches are compliant with the Basel framework,” he told the FT.
The Fed says the proposed changes to the treatment of loans will increase large banks’ capital by less than half as much as changes to the treatment of their trading book that the final Basel III rules will also make. Yet lobbyists are focusing their efforts on the lending issue as this is seen as more likely to hold sway with politicians on Capitol Hill concerned about the health of the economy.
Wall Street lobby groups argued this week that the standardised approach for loan books was “punitive” and arbitrary. The Banking Policy Institute said that it would have “real costs for everyday Americans”.
“The virtue of internal models is that they are inherently more granular and risk-sensitive than government-imposed, one-size-fits-all standardised methodologies; they can also be adjusted over time to reflect changing behaviour,” the BPI and the American Bankers Association said in a joint submission to the Federal Reserve, the Federal Deposit Insurance Corporate and the Office of the Comptroller of the Currency who are designing the rules.
They added that the proposed rules would put the US banks at a competitive disadvantage to international rivals, and criticised the overall capital package for “its failure to consider both its costs and benefits, not just to banks but to all corners of the US economy”.
Others have questioned whether higher capital requirements would be as punitive as US banks fear.
Jeremy Kress, an assistant professor of business law at the University of Michigan Ross School, said that it was “nonsense” to say that banks could not afford to lend if they had higher capital requirements, pointing to banks’ recent bumper profits. Wall Street’s top four lending banks grew net income by $10bn last year, as JPMorgan Chase posted the highest annual profit ever enjoyed by an American bank.
“US regulators do not have a statutory mandate to promote the financial services industry’s international competitiveness,” he said. “They are directed to prioritise the safety and soundness of the US banking system.”
Jared Chebib, a regulatory capital expert at EY, said it was “very hard to say in a blanket way” that the US would end up with a more penal system than other jurisdictions because there are so many inputs to setting a bank’s capital.
De Cos hinted that the ‘endgame’ package and a handful of possible rule changes related to last year’s spate of blow ups might not be the Basel Committee’s final word on global bank capital.
“It (another package) is not on the agenda but, in the end, it will depend on the evolution of the sector, of the economy as a whole,” he said. “To what extent these new risks can be covered by the requirements that we have today or [if we] have to give a different policy response”.
