On January 31, the House Financial Services Subcommittee on Financial Institutions and Monetary Policy Subcommittee held a hearing entitled “Rules Without Analysis: Federal Banking Proposals Under the Biden Administration.” Witnesses in the hearing were:
- Mr. Greg Baer, President & Chief Executive Officer, Bank Policy Institute
- Mr. Bryan Bashur, Director of Financial Policy, Americans for Tax Reform
- Mr. Randall Guynn, Chair, Financial Institutions, Davis Polk
- Professor Jeremy Kress, Assistant Professor of Business Law, Stephen M. Ross School of Business, University of Michigan
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the discussion section below.
- Today’s hearing discussed the potential impacts of the Basel III Endgame Proposal for banks, consumers, and producers. Members on both sides of the aisle expressed concern with the proposal’s lack of analysis, the impact it will have on the cost and availability of credit, and its potential to make it more expensive for manufacturers, farmers, and other end-users to hedge risk.
- Republican Members criticized Basel III for its lack of economic analysis and regulatory justification. The majority of Republicans asked questions regarding Basel III’s impact to small businesses and local communities. Representatives Monica De La Cruz (R-TX) and John Rose (R-TN) asked witnesses specifically about the proposal’s impact to the ag industry.
- Some Democrat Members expressed some concern over Basel III’s impact on the access and availability of credit and loans for marginalized communities. Despite opposition, Democrats such as Representative Bill Foster (D-IL) emphasized the importance of Basel III to ensure banks are well-capitalized and able to withstand geopolitical shock.
SUMMARY
Opening Statements and Testimony
Subcommittee Chairman Andy Barr (R-KY)
- There has not been any analysis of why the existing banking capital framework needs to be overhauled or how the numerous regulatory proposals over the past year will work together. Basel III will increase regulatory costs for about $22 trillion in assets or 80 percent of all U.S. banking assets. Despite this substantial impact on our economy, the needed analysis seems to be an afterthought, and far too many elements of the proposal are arbitrary and capricious.
- Basel III will reduce credit availability and increase cost for consumers, homebuyers, businesses, large and small, manufacturers, municipalities, farmers, ranchers, and more. The proposal will make U.S. institutions less competitive globally and will chase activities outside of bank’s regulatory perimeter for banks, posing threats to financial stability. We know nothing about how the proposal’s provisions would interact with the numerous other significant recent and prospective regulatory proposals.
Subcommittee Ranking Member Bill Foster (D-IL)
- Higher capital requirements may lead banks to reallocate their resources, ultimately resulting in a transferring of business away from large banks to smaller banks or to nonbanks. I fear what the implications of the systemic risk to our banking system will be of that sort of transfer. I hope regulators are properly analyzing the unintended consequences this proposal may hold as they look at the final update of this rule. However, during the lead up to Dodd-Frank the banking sector argued that new requirements would make the U.S. banks unprofitable and uncompetitive in comparison to other banks, but U.S. banks have continued to earn record profits and increase their market share around the world. The key issue is not the straightforward impact of increased capital requirements, but the unintended consequences it might have.
Greg Baer, President & Chief Executive Officer, Bank Policy Institute
- If adopted, the capital rule proposed by the federal banking agencies would have a profound effect on the availability and cost of credit for nearly every American business and consumer, as well as on the resiliency of U.S. capital markets. The U.S. economy would suffer a significant, permanent reduction in GDP and employment. U.S. capital markets would become less liquid and therefore more dependent on nonbank intermediation in normal times and on governmental support when those nonbanks step away during times of stress. At a micro level, the proposed risk weight for any given asset class impacted by the proposal is based on no identified data or historical experience and no economic analysis.
Bryan Bashur, Director of Financial Policy, Americans for Tax Reform
- Basel III is economically significant and needs clear Congressional authorization pursuant to the major questions doctrine. Currently, the proposal is an abuse of regulators’ discretion and deviates from congressional intent. Regulators also fail to analyze both the holistic and granular impacts on the broader U.S. economy. Basel III fails to incorporate an economic analysis of trading activity that would justify the higher capital requirements.
Randall Guynn, Chair, Financial Institutions, Davis Polk
- Basel III will increase the cost and reduce the supply of market making. It will become more expensive for businesses and local governments to raise debt and equity capital. It will make it more expensive for manufacturers, farmers, and others to hedge their risks. Foreign banks are subject only to a capital conservation buffer of 2.5 percent, whereas most large U.S. banks are subject to a stress capital buffer that is higher than 2.5 percent and never lower.
- By imposing a new capital tax on credit risk, the proposal will increase the cost and reduce the supply of credit. This result in an increase of credit being supplied to the economy by nonbank financial institutions where there is less visibility, less liquidity, and less capital. Although Basel III regulators have said they performed a holistic review of capital requirements, they did not release any data from that review and certainly no rigorous cost-benefit analysis.
Professor Jeremy Kress, Assistant Professor of Business Law, Stephen M. Ross School of Business, University of Michigan
- Higher capital requirements are essential to make the U.S. banking system safer and more efficient. Stronger bank capital levels will promote credit availability throughout the economic. Better capitalized banks lend more during economic and financial stress, precisely when households and businesses need credit the most. Requiring banks to fund themselves with more equity will not impair credit availability, but it will modestly reduce bank stock prices, share buybacks, and executive compensation. Congress has not imposed any cost-benefit analysis requirement on the federal banking agencies.
Discussion
Ag Impact
De La Cruz (R-TX): Have the regulators considered how this proposal will impact farmers and ranchers? Baer: No, they have not considered how these capital requirements will impact end users in derivatives markets.
Rose (R-TN): How will Basel III impact the ag industry? Bashur: This will make it harder for ag producers to hedge interest rate risks. Corn and soybean markets will be particularly affected as the majority of futures and swaps for these assets require the use of intermediaries.
Other
Waters (D-CA): Will Basel III help banks avoid failures? Kress: Yes.
Barr (R-KY): What are the impacts of Basel III on market risk? Baer: There is overlap with Basel III and existing regulations like stress tests that makes the proposal redundant.
Barr (R-KY): Can you discuss how Basel III will impact loan cost? Guynn: It will increase the cost of loans.
Barr (R-KY): Is it important to provide sufficient comment period for the Fed’s quantitative impact study of Basel III? Guynn: It is incredibly important, and I was surprised that they did not release the quantitative impact study at the same time as the rule in this case.
Foster (D-IL): Do you think that Basel III will lead banks to no longer be competitive and lose market share? Kress: No; Baer: Yes; Guynn: They will be competitive but face much higher costs; Bashur: The strain over time could make them much less competitive.
Foster (D-IL): Given recent geopolitical conditions, do you think the preexisting stress tests are enough on their own to ensure banks are well-capitalized? Baer: Yes; Kress: No. We need more variability in our stress tests as evidenced by the banking crisis last year.
Posey (R-FL): How will Basel III impact mortgages and small business loans? Baer: In terms of mortgages, it will increase the risk weight percentage and ultimately harm loan availability; Guynn: Small businesses would have to borrow at a higher risk weight;. Bashur: It will largely impact market liquidity and have downstream effects.
Luetkemeyer (R-MO): What does this proposal accomplish? Baer: There are good arguments for having international standards, but that is not what they have done as we already have rigorous stress tests; Bashur: This rule will financially impact small businesses.
Loudermilk (R-GA): Would there be a downside to entirely withdrawal this proposal? Baer: I think that would be appropriate and necessary.
Casten (D-IL): Will Basel III impact clean energy tax credit availability? Kress: Tax equity impact will be a small part of the overall Basel III proposal.
Green (D-TX): Is it true that banks lend more when they are well-capitalized? Kress: Yes.