The past three years of economic volatility have exacted a profound toll on many Americans, testing the resilience of households and businesses alike. During this period, the largest banks, fundamentally strengthened by a series of changes, have served as a source of support by extending enormous amounts of credit, helping customers navigate uncertainty, and stabilizing the broader banking sector at a critical moment. Now, as the CEOs of these banks gather on Capitol Hill, Congress must ask itself if proposed regulations on capital jeopardize the essential work of these institutions.
The capital regulation plan known as Basel III Endgame will increase capital requirements by 20% or more for the eight largest U.S. banks. This is an excessive move, considering the tripling of high-quality capital for these banks over the past 15 years. Higher capital requirements, as noted by Federal Reserve Chair Jerome Powell, raise the cost of–and reduce access to–credit.
The plan will certainly compound the burden of higher post-pandemic interest rates, particularly for those with lower incomes. Americans will have a harder time getting a loan, securing a mortgage, or saving for their retirement or a child's college education.
The impact isn't limited to individual consumers. Small businesses relying on credit and farmers needing funds for operations and equipment will face difficulty securing much-needed capital.
A chorus of voices from the left and the right have come out against this proposed rule. Bipartisan consensus is rare these days, so the growing coalition of policymakers, advocacy groups, and community leaders warning against the negative impacts of stricter capital requirements is not something to take lightly. Senator Mark Warner (D-Va.) has emphasized the potential compounding effect of tougher capital standards, high interest rates, and disruptions in the commercial real estate market as a "perfect storm." Senator John Tester (D-Mont.) stated that he is worried about how this will impact working Americans, explaining he has "some concerns about the proposed changes, and what its impact will be on workers and households, small businesses, access to credit, and the overall vibrancy of our capital markets." In a letter to regulators, 39 Senate Republicans, led by Senator Tim Scott (R-S.C.), highlighted the resilience of the well-capitalized U.S. banking system and argued the proposal would negatively impact the economy while making credit costlier and more difficult to obtain for millions of Americans.
Given these concerns, it is fair to ask why capital increases of this size are necessary. But no one seems equipped to provide an answer. On the contrary, the predominant official assessment of the banking sector, and the largest banks in particular, has been laudatory. As a matter of fact, every hypothesized loss the proposal aims to address has been experienced under real-life stress tests such as the pandemic, and the largest U.S. banks have continued to support the economy despite those losses under current capital requirements.
Reflecting on the years of reform under the Dodd-Frank Act and Basel III, Chair Powell highlighted improvements in the banking system's resilience, stating, "The large banks in the United States are very strong, well-capitalized, a lot of liquidity and they've been a source of strength, I think, through the last couple of events."
The future path of the U.S. economy is far from certain and hardworking Americans will pay a price if regulators demand new, unjustified capital requirements. Policymakers must demand extensive changes to the Basel III Endgame proposal so the banking sector can continue its essential role in the U.S. economy–and to avoid taxing consumers and businesses for no appreciable benefit to financial stability.
Kevin Fromer is the president and CEO of Financial Services Forum.
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