HOUSE FINANCIAL SERVICES COMMITTEE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
Hearing on Right-Sizing the U.S. Bank Capital Framework
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On December 11, the House Financial Services Committee Subcommittee on Financial Institutions held a hearing entitled “Right-Sizing the U.S. Bank Capital Framework: A Return to Tailoring, Economic Growth, and Competitiveness.” Witnesses in the hearing were:
- Margaret Tahyar, Head of Financial Institutions, Davis Polk & Wardwell LLP
- Amanda Eversole, President and Chief Executive Officer, Financial Services Forum
- Andrew Olmem, Managing Partner and Co-Leader of the Financial Services Group, Mayer Brown
- Mike Flood, Head of Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
- Simon Johnson, Professor of Entrepreneurship, MIT Sloan School of Management
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 discussion.
Key Takeaways
- Representative Scott (D-GA) raised how sectors like agriculture rely heavily on access to credit and risk management tools, highlighting the role large banks play in providing hedging services through futures, options, and swaps. He questioned the direct effect on farmers if Basel III makes it less attractive for banks to offer, or how it might limit the availability of certain clearing services, particularly customized or longer-term derivatives. He also asked whether farmers face any disadvantages when foreign competitors operate under different capital rules and have lower hedging costs. Eversole stated how Basel III has an impact on the ability to manage risk and how expensive it is to do so. She emphasized the need to get Basel III right, especially for farmers, citing factors such as the impacts on fuel prices for biofuels and ethanol.
- Committee Chairman Hill (R-AR) outlined how thoughtful tailoring can free up productive capital, with capital standards that strengthen financial security without unduly limiting economic growth or U.S. banks’ ability to compete internationally. He raised how, despite U.S. banks remaining well-capitalized and resilient, it does not mean that current inefficiencies, such as disproportionate compliance and capital burdens compared to bank size, should be ignored.
- Subcommittee Chairman Barr (R-KY) criticized the Biden administration’s Basel III proposal for placing U.S. banks at a disadvantage against foreign competitors, emphasizing how capital should be right-sized to protect liquidity. He highlighted the need to account for economic growth by indexing regulatory and category thresholds to ensure capital requirements are proportional based on a bank’s size, complexity, and risk profile. He reiterated the need to design well-calibrated capital requirements and a tailored framework that strengthens stability without sacrificing global competitiveness, dismantles prior regulatory overreach, and accounts for varying risk profiles over one-size-fits-all mandates.
- Subcommittee Chairman Barr raised how, even under the repurposed Basel III Endgame, the leverage ratio remains unchanged and creates the potential for double-counting capital requirements. Eversole discussed how recalibrating the enhanced supplementary leverage ratio (ELSR) will enable banks to intermediate the U.S. Treasury market without sacrificing overall financial stability. Tahyar raised how low-risk activities like Treasury market intermediation have been impacted by binding leverage requirements.
- Committee Ranking Member Maxine Waters (D-CA) warned that reducing capital standards will make banks less resilient, less likely to lend during periods of stress, and more likely to fail. She highlighted that if the goal is to strengthen the financial system, Congress should advance overdue deposit insurance reforms. Subcommittee Ranking Member Foster (D-IL) outlined how the Dodd-Frank Act’s tiered approach of applying the most stringent capital requirements to the largest, most complex banks and implementing safeguards, such as higher capital ratios, stress testing, and resolution planning, enhanced the financial system’s supervision and regulation. On the Basel III re-proposal, he called for a robust cost-benefit analysis and data-backed proposals, alongside consideration of the combined impact on financial stability due to changes in areas such as leverage and stress testing.
SUMMARY
Opening Statements and Testimony
Committee Chairman French Hill (R-AR)
Regulators have the opportunity to establish credit and capital standards that strengthen financial security without unduly limiting economic growth or banks’ ability to compete internationally. Despite challenges, U.S. banks remain well-capitalized, resilient, and able to support lending, investment, and economic growth. This does not mean we should ignore the inefficiencies in the current framework. Congress must encourage regulators to tailor capital requirements based on bank size, complexity, and risk profile rather than applying a one-size-fits-all approach. Thoughtful tailoring can free up capital for productive uses, helping banks support economic expansion.
Committee Ranking Member Maxine Waters (D-CA)
President Trump’s regulators and Republicans are tearing down the safeguards that keep our banks safe to ensure stable economic growth. Reducing capital for our largest banks will make them less resilient, less likely to lend during periods of stress, and more likely to fail. Weakening these safeguards and guardrails leaves Americans to bear the consequences. We saw this in 2008 when banks gambled with borrowed money. If we want to strengthen our financial system, we must advance overdue deposit insurance reforms. On the issue of capital and continued efforts by Republicans to reduce the capital that the bank should hold, we are going to have a fight.
Subcommittee Chairman Andy Barr (R-KY)
For years, U.S. banks have been forced to retain capital at levels that far exceed standards applicable to our global competitors, and the results have been detrimental to U.S. firms. Committee Republicans support a tailored, common-sense capital framework that protects the safety and soundness of the U.S. financial system. Capital should be right-sized to protect the economy, not inflated for ideological reasons, used as a tool to achieve political objectives, nor calibrated without regard to the real-world impacts on lending liquidity and economic vitality of institutions. The Biden administration’s initial Basel III proposal was deeply flawed and received bipartisan criticism. It threatened to elevate capital burden so far above international norms that entire categories of banking business lines, from residential mortgages to market making, could have migrated to offshore institutions. Fortunately, the bipartisan message was clear that Basel III must be reproposed, and that its re-proposal is not just an opportunity, but a responsibility. We need a framework that is proportional, tailored, and grounded in empirical analysis, as well as recognizes the diversity of the U.S. banking system.
Subcommittee Ranking Member Bill Foster (D-IL)
In response to the 2008 financial crisis, Congress passed Dodd-Frank, which took a tiered approach, applying the most stringent capital requirements to the largest, most complex banks that posed the greatest risk to financial stability, which included higher capital ratios, stress testing, resolution planning, and other prudential requirements. Following the financial crisis, global financial regulators convened in forums like the Basel Committee on Banking Supervision to facilitate cooperation and prevent a race to the bottom. Under President Trump, the banking regulators have taken steps that undermine this financial stability. They have also moved to weaken stress testing for the largest banks, cut staffing at the Financial Stability Oversight Council (FSOC) and its member agencies, and are pushing firms to engage with digital assets that can experience extremely high price volatility. We expect banking regulators will soon propose a revised rule to implement the principles of Basel III. Under the last iteration of the proposal, Committee members raised certain concerns about the proposal related to the capital treatment of things like derivatives used for risk management. We must have a robust cost-benefit and data-backed analysis for the coming proposal and consider the combined impact to financial stability with other changes being advanced on leverage and stress testing.
Margaret Tahyar, Head of Financial Institutions, Davis Polk & Wardwell LLP
Capital regulation is long overdue for a rethink, and we should encourage the banking regulators to move quickly to appropriately implement the Basil III Endgame with appropriate data and appropriate cost-benefit analysis. Capital is very important, but it is not the only tool in the financial stability kit. Choices about the calibration of capital are political economy choices that involve credit engineering and can also change the regulatory perimeter. Tailoring is the solution so that we do not treat large banks the same as community banks. We cannot expect capital to be the sole assurance against financial instability. We should see it as part of an integrated system that also includes liquidity regulations, early intervention tools, resolution planning, credit concentration limits, contingency planning, risk management, loss-absorbing debt requirements, deposit insurance, and hands-on supervision. Capital absorbs losses, but it is not liquidity regulation, so it does not help against quick deposit runs. Capital levels going into the great financial crisis were too low, but today, we have to ask whether current capital levels also come at a cost to the real economy. Risk weighting for the purposes of risk-based capital requirements is a form of credit engineering. The zero percent risk weighting for U.S. Treasuries and the International Basel Committee’s 1250 percent risk weighting for crypto assets reflect political economy choices. If implemented, crypto assets’ risk weighting would seem to be contrary to the GENIUS Act. The update should be data-driven, with an understanding that it will never be perfect. Calling this latest round of rulemaking “Basil III Endgame” is kind of a misnomer, implying that once the next round of rules takes effect, we are done. The economy and the financial system will remain in constant flux, and banking regulators should periodically review capital regulation. Tailoring is especially critical for capital regulation in the U.S., given the complexity of our economy and many different sizes of banks, and we need to avoid that barbell. It is fair to question whether we are appropriately tailored and whether there should be some indexing, particularly as the economy grows. All policy choices have tradeoffs, but our focus should be on the real economy, U.S. competitiveness, and wealth creation.
Amanda Eversole, President and Chief Executive Officer, Financial Services Forum
U.S. G-SIBs have never been more capitalized and more resilient, subject to the most stringent regulatory standards among both U.S. and foreign competitors. More capital is not always better, with economic tradeoffs to higher requirements. A three percent increase in required capital costs the U.S. economy between $100 and $150 billion per year. After years of post-crisis implementation, now is the time to modernize the large bank capital regime. Capital requirements must be supported by data and calibrated accordingly. The Basel III Endgame proposal from 2023 serves as a prime example, as the proposal’s regulatory approach would have increased capital for foreign members by 25 percent without any clear justification or analysis. More than 97 percent of commenters raised concerns with the proposals, and 86 percent of those comments came from outside of the banking industry. It is critical that we take the economic impacts into consideration when determining capital rules, and we look forward to the revised Basel III Endgame proposal that meets the needs of the U.S. economy. Several aspects of the large bank capital framework make it harder for U.S. banks to compete, pushing activity to foreign banks and less regulated non-banks. This migration of risk makes the system less safe and less stable. The GSIB surcharge is perhaps the best example of a self-inflicted disadvantage with our foreign competitors. The U.S. approach to the GSIB surcharge is nearly twice that of our foreign competitors, resulting in an additional $100 billion in capital that could be deployed into the U.S. economy. We appreciate the commitment by regulators to review this rule and look forward to a proposal that will harmonize the U.S. GSIB surcharge with the international standard. Enhanced transparency and public accountability are the bedrock principles. The Fed’s initiative to improve the transparency of stress testing models and scenarios will improve bank risk management, reduce volatility, and allow banks to better serve their clients and customers. The world has changed over the last fifteen years, and regulations have not kept pace. Thankfully, regulators have begun to address this problem by recalibrating the ESLR, which will enable banks to intermediate the U.S. Treasury market without sacrificing overall financial stability.
Andrew Olmem, Managing Partner & Co-Leader of Financial Services Group, Mayer Brown
It is critical that capital requirements are appropriately calibrated. This Committee’s oversight of the prior Basel III Endgame proposal played a valuable role in raising bipartisan concerns about its potential adverse consequences. Those concerns prompted the banking regulators to pause and reconsider the proposal, with Basel III Endgame now moving in a better direction. I concur on the importance of basing capital requirements on the best data and research available, and that choices about capital requirements are public policy choices. It is important to view any capital proposal within the context of the larger regulatory reforms the banking regulators are currently undertaking, with the most important as the ongoing reform of bank supervision. Effective supervision is an essential companion to capital requirements because supervisors can identify and address risks that do not show up on balance sheets. Unfortunately, bank supervision has become far too bureaucratic, with supervisory matters lingering for years unresolved. Supervision should be focused on identifying problematic and material risks, addressing them, and returning a bank to normal operations. One-size-fits-all regulation can undermine competition and the ability of banks to devise unique business models. To address this problem, Congress has statutorily mandated in both the Dodd-Frank Act and in the Economic Growth, Regulatory Relief, and Consumer Protection Act that banking regulators tailor enhanced prudential regulation. This mandate sensibly seeks to prevent a $300 billion bank from being regulated in the same manner as a $2, $3, or $4 trillion bank. However, changes in the marketplace and inflation can push banks into inappropriate tailoring categories. Given the clear congressional mandate, the banking regulators have reasonable grounds for revising and updating the existing tailoring categories. Unfortunately, U.S. bank regulation has diminished the attractiveness of the U.S. market and made the banking system less innovative and adaptable. These trends need to be corrected. The finalization of the Basel III Endgame proposal, updating the tailoring thresholds, and reforming bank supervision are important steps for modernizing U.S. bank regulation.
Mike Flood, Head of Center for Capital Markets Competitiveness, Chamber of Commerce
Since the release of Basel III Endgame proposal in 2023, numerous state and local government entities and bank customers have raised significant concerns. In reaction, the previous Fed Vice Chair recognized that not only raising capital, but raising it beyond global standards, should be recalibrated. We applaud the current prudential regulators for continuing this process, including updating the ESLR and reforming the stress testing framework. Eighty-seven percent of businesses have been negatively affected by financial regulation, and 46 percent have delayed or canceled investments due to regulatory costs. A Basel study stated that for every one percent increase in capital, we should expect a 13-basis-point increase in loan spreads. The Basel Committee said higher capital and liquidity requirements are assumed to increase the cost of main credit. More capital is unnecessary. The regulators themselves do not support increasing capital. In the past three years, the past three stress tests revealed that banks can withstand “a substantial downturn, remain above minimum capital requirements, and lend to the U.S. economy.” Bank capital has more than tripled since 2009. Over the past five years, eleven banks have failed, equal to an annual average bank failure rate of .052 percent. Ninety-nine percent of U.S. companies are private companies, and they are seen by Basel III Endgame as more risky than public companies. Two lines of credit, under Basel III Endgame, would be more expensive, beyond global standards. At a time of significant affordability concerns, it is critically important to calibrate the entire bank capital structure to fit the size and complexity of the U.S. banking system. This includes all banks: local community, regional, super-regional, national, international, and global banks. The Chamber appreciates the current regulatory efforts to update the capital framework and bring supervision back to materiality. We urge regulators to adopt the following recommendations: calibrate any final rule to preserve affordable lending, market-making liquidity, and a competitive U.S. banking system; base requirements on robust economic analysis that considers the impact on lending and economic growth; and update and tailor capital requirements, as well as thresholds, to reflect the size and risk profile of individual institutions for all categories of banks.
Simon Johnson, Professor of Entrepreneurship, MIT Sloan School of Management
The weighted average supplementary leverage ratio (SLR) for the eight U.S. G-SIBs peaked at close to seven percent in 2017 and is now 5.8 percent, which is an increase in leverage. European and Canadian G-SIBs are more leveraged, with an average SLR at 4.89 percent. This is exactly the same relative situation as prevailed before the global financial crisis of 2008: the biggest European banks are more leveraged than the biggest U.S. banks. But when a crisis breaks, more leverage means more vulnerability for individual banks and the financial system. Thank goodness that the FDIC pre-2008 resisted attempts to allow more leverage in the U.S. banking system by insisting on lower leverage. It is not to the European advantage that their big banks are more leveraged, and it is a major vulnerability for them. Do not race Europeans to the bottom. Unfortunately, the FDIC today is in the exact opposite position as before 2008 and just signed off, along with the Fed and the OCC, on reducing the SLR. Based on the regulators’ own calculations, this recent rule change will allow the SLR to fall to around 3.8 percent for those thirteen U.S. G-SIBs. We are now discussing how to adjust risk-weighted capital and stress tests and other things that will allow the banks to move closer to that leverage. The regulators have clearly signaled that we are heading back toward the leverage ratios that prevailed before the crisis of 2008, and we are doing this without a proper cost-benefit analysis nor any kind of robust economic analysis. What we need is a careful and complete study from the regulators of what will happen to the system’s stability with lower capital requirements. They have not provided this despite repeated requests. One presumed impact of AI is that decision-making will speed up globally. AI agents will rush into trades, pushing up asset prices. These same algorithms will also rush out, creating various kinds of potential runs and fire sales. We are quite likely to experience various forms of AI-agentic runs on our banks, and what happened to Silicon Valley Bank will seem slow by comparison. Bank capital protects against insolvency and is the loss-absorbing buffer. If the world is becoming more unstable, we should want our big banks to have more loss-absorbing capital. Instead, the regulators are pushing in a reckless manner toward allowing less capital. Capital at the largest banks is eroding, and regulators are failing when they allow leverage to rise to pre-2008 levels. To achieve a resilient national infrastructure, you need more loss-absorbing equity capital in the banking system, not less.
DISCUSSION
Subcommittee Chairman Barr (R-KY): How can regulatory tailoring and enhancing U.S. bank competitiveness through right-sizing the capital framework lower the cost of capital? Eversole: When it relates to bank capital, one size does not fit all. We have the ability to make sure that we get it right, with Basel III Endgame as a perfect example.
Subcommittee Chairman Barr (R-KY): What are the downstream effects of inflated risk weights under the Biden administration’s Basel III Endgame? Flood: The amount of banks is decreasing, so there would be increased costs or lack of availability of credit at banks. We know that increased compliance costs affect every bank and have seen how that has led to consolidation at the lowest levels. There is a downstream effect.
Subcommittee Chairman Barr (R-KY): How should regulators account for higher risk-weighted assets, while the leverage ratio remains unchanged, to avoid double-counting capital requirements, especially in low-risk, high-liquidity environments? Tahyar: Double-counting is a real problem. In 2023, regulators did not do a bottoms-up, data-driven analysis. Currently, it is a bottom-up, data-driven analysis that is being promised by bank regulators. Leverage ratio became the binding constraint as Treasury markets expanded, and there should be a rethink.
Subcommittee Chairman Barr (R-KY): What is the importance in indexing regulatory thresholds? How will this help ensure banks are holding appropriate capital that accurately corresponds with their size, risk, and scope of activities? Olmem: If we do not index the threshold, eventually we will not have tailoring because, over time, inflation will move institutions into higher and higher categories. Since 2019, when the categories were adopted, we see inflation run at about 25 percent. Nominal GDP is up thirty percent and is threatening to put institutions into higher categories simply because of nominal changes in the economy.
Representative Huizenga (R-MI): Does the current framework disadvantage U.S.-based institutions compared to international peers? Eversole: It does. If you look at the GSIB surcharge, we are twice that of our international competitors. From a consumer perspective, you can see the cost of credit has increased by higher capital.
Representative Williams (R-TX): How would higher capital requirements in Basel III translate into less availability for banks to lend, given that even modest increases can significantly reduce lending capacity by forcing banks to redirect balance sheet resources? Eversole: We need to update and change risk weighting because there should not be a thumb on the scale for public companies versus private companies. There is an impact on more capital on the end-users; Flood: Using Basel III Endgame as an example of excessive capital, for the drawn part of your line of capital, the risk weight increases by ten percent, above and beyond global standards. Oddly, for the undrawn part, it goes from twenty to fifty percent. Even for the money not used, it increases by thirty percent. Likely, your line shrinks, or you pay more.
Representative Velazquez (D-NY): Even after the first part of the Basel III capital regime was implemented in 2016, is it true that U.S. banks continued to lend and make record profits while the economy continued to grow? Johnson: Absolutely. In the mid-2010s, there was a lot less leverage in the big banks than there is today. The smaller banks have chosen to maintain less leverage throughout this period than the big banks. It is the big banks that have a large implicit guarantee from the U.S. taxpayer, and is what too big to fail means. They want as much leverage as they can get because their debt is super cheap.
Representative Rose (R-TN): As regulators prepare a revised Basel III Endgame proposal and address concerns about a sixteen percent average increase in capital requirements and over twenty percent for some banks, what are the most important principles to follow to ensure the final rule appropriately balances risk weighting with Congress’s statutory mandate to tailor requirements based on bank size and risk profile? Olmem: The first is to make sure the risk weights are based on the best available data. Capital should correspond to risk. The second is simplicity. Capital requirements have become simply too complex and hard to understand. There are limits on how much simplicity we can get out of the system, but certainly any effort in that direction is beneficial. It is important to take a view of the totality of all the regulations and reforms that have happened over the last fifteen years, and to make sure they all work together. We have stress testing, additional leverage ratios, the Volcker Rule, and risk retention rules. We have a 2,000-page Dodd-Frank Act of rules on banks that have substantially changed their risk profiles. What the regulators are doing now is trying to make it all work together in a more efficient way and diminish the distortions in credit allocation occurring because of the lack of coordination amongst this system.
Representative Scott (D-GA): What would be the direct effect on farmers if Basel III makes it less attractive for banks to offer hedging services? Do you anticipate that certain products, particularly customized or longer-term derivatives, would become less available to farmers? Eversole: The reality is that it is going to make it more expensive. Basel III has an impact on the ability and how expensive it is to manage risk. It is about farmers and also where those products go. It also impacts the price of fuel in terms of biofuels and ethanol. We must get this proposal right and provide certainty to America’s farmers, or it will impact not only the cost, but also availability.
Representative Scott (D-GA): Do you believe that farmers face any disadvantages if foreign competitors operating under slightly different capital rules have lower hedging costs? Johnson: It is important to study this question and to examine exactly what kinds of market facilities, and also subsidies, are available to farmers and other competitors in other parts of the world. If there are unfair forms of competition, those should be looked at, and there are various legal and regulatory remedies available under those circumstances. Having a strong, resilient banking system, including those who just focus on farmers, is incredibly important. Those institutions have substantially less leverage than the too-big-to-fail banks, and are choosing not to overleverage, which I commend. Unfair foreign competition is a problem and needs to be addressed in a careful, well-regulated way. Allowing the big banks to become overleveraged is not helpful to farmers.
Representative Kim (R-CA): How have low risk activities like Treasury market intermediation been impacted by binding leverage requirements? Tahyar: This was worse before the recent change in the ESLR, but it is still part of the leverage ratio. The market for Treasuries has simply exploded with the increase in the deficit. Those entities that would have been trading in Treasuries, if the leverage ratio becomes binding on them, are going to stay out of the Treasury market. Now we are more dependent on non-banks or on foreign actors in the market for Treasuries. Stablecoins may eventually make a difference. What we have experienced in the Treasury market is certainly bound up with the fact that the classic players have not been playing the way that they used to.
Representative Lynch (D-MA): Would it not make sense to increase capital requirements specifically for firms engaging in crypto activities? Johnson: Yes, absolutely. Crypto is dangerous. The leverage is going down in community banks and regional banks. It is the too-big-to-fail banks leveraging up, and they are the ones that want into crypto. It makes no sense.