On September 10, 2024, Michael S. Barr, the Federal Reserve Board Vice Chair for Supervision, delivered a speech at the Brookings Institution outlining potential changes to the Basel III Endgame and G-SIB Surcharge proposals, originally released in July 2023. Barr characterized these changes, developed collaboratively by the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), as both “broad and material“.
While Barr did not specify an exact release date for the reproposal, he indicated that it would be reviewed in an open board meeting, followed by a 60-day comment period. Implementation is anticipated one year after the final rule’s release.
Possible Changes to the Reproposal
The potential changes, as highlighted by Barr and summarized below, include:
- Application of the “Tailoring Rule”: This rule would be applied to the Basel III Endgame proposal, categorizing banking institutions as Category I through IV to reflect their risk, complexity, and systemic importance. This suggests potential exemptions for Category III and IV institutions.
- Effects across All Areas: Changes are expected to impact credit, operational, and market risk areas, potentially reducing the capital requirements outlined in the July 2023 proposal.
G-SIB Surcharge Changes
- Client Clearing: The reproposal may not incorporate the previously proposed changes to capital requirements related to client clearing.
- Calculation Improvements: Changes aim to refine the calculation of capital surcharges for Global Systemically Important Banks (G-SIBs) by accounting for shifts in the global banking landscape since 2015. This includes considering the influence of inflation and economic growth on a G-SIB’s systemic risk profile.
Calls for a Re-Proposal and Comprehensive Analysis
Industry groups and experts have urged a complete re-proposal of the Basel III Endgame rule, emphasizing the need for a thorough cost-benefit analysis and a quantitative impact assessment encompassing the wide-ranging market and economic consequences stemming from the proposal.
The consensus among industry participants is that a re-proposal was not just advisable but necessary due to the proposal’s extensive scope and significant deviation from the initial intent of the Basel III reforms. They argued that the overwhelmingly negative response to the initial proposal, with the vast majority of comment letters criticizing its provisions, further underscores the need for a re-proposal.
Critics of the proposal also express concern over the proposed changes’ potential “second-order” effects, including higher financing costs, reduced risk-hedging activities, and broader economic repercussions. These concerns underscore the need for a comprehensive assessment of the proposal’s potential consequences before its implementation.
The banking industry has strongly opposed certain aspects of the initial proposal, particularly concerning potential negative impacts on the U.S. economy, housing markets, and credit access. Bob Broeksmit, President and CEO of the Mortgage Bankers Association (MBA), argued that the proposal contradicts the Biden Administration’s goals of narrowing the racial homeownership and wealth gaps and promoting affordable housing.
The industry maintains that the significant capital increases outlined in the proposal would likely hinder economic growth and discourage bank participation in lending and servicing activities, particularly within the single-family and commercial/multifamily sectors. They argue that this could lead to banks withdrawing from the mortgage business, making homeownership less achievable, particularly for first-time and low-to-moderate-income borrowers.
Addressing the Critics
The reproposed Basel III Endgame rules outlined by Barr appear to address some of the key issues raised by industry critics of the original proposal. The application of the “Tailoring Rule” suggests a less burdensome approach for smaller institutions, potentially exempting Category III and IV banks from certain requirements. The potential reduction of risk weights for certain exposures, including residential real estate and low-risk corporate debt, along with the elimination of the minimum haircut for securities financing transactions, directly address concerns about increased lending costs and reduced credit access. Furthermore, the indicated refinements to the G-SIB surcharge calculation demonstrate a responsiveness to industry feedback regarding the initial proposal’s potential negative impact on financial market stability. However, it remains to be seen how effective these changes will be in addressing industry concerns, pending the release of the full reproposal and subsequent analysis by stakeholders.