SIFMA: New commercial capital rules proposed for the end of Basel III would hamper US banks, capital markets and the broader economy. (2024)

While this complex proposal will have significant economy-wide effects, one of its least discussed components would potentially have the most far-reaching impacts. As SIFMA, which represents the interests of stockbrokers, investment banks and asset managers, noted in comment letters sent to the agencies last month, the proposed capital increases for banking organizations’ trading activities would be much more significant than stated in the proposal and are not proportionate to the underlying risks. The proposed changes will negatively affect the activities of large banks in the capital markets, with serious knock-on effects for the real economy, affecting businesses, consumers and savers who benefit directly or indirectly from the banks’ involvement. in the US capital markets.

Regulators have not fully taken these impacts into account because they did not conduct the robust and necessary analysis before issuing the proposal that demonstrates why the Basel III Endgame capital increases are necessary at this time and what the costs of doing so would be for markets and specific markets. products as well as the economy in general.

To fill some of this information gap, SIFMA facilitated an industry quantitative impact study (QIS) with input from the eight largest US banks. It found that the proposed fundamental review of the trading book (FRTB) and revised credit valuation adjustment (CVA) framework would result in a 129% increase in market risk-weighted assets and CVA under the new approach. Those increases are likely to be even larger given the significant duplication of risk capture between the proposed new framework and the Federal Reserve’s stress testing regime, leading to a significant overcalibration of capital requirements for trading activities. of the big banks.

Given that US capital markets provide 75% of the financing for non-financial companies and intermediate the hedging activities of these companies, such dramatic capital increases would undermine market liquidity and vitality and increase costs and reduce options for companies. businesses, consumers and government. entities that depend on the US capital markets for the vast majority of their financing. In turn, this would negatively affect American businesses, households, and taxpayers, and would have a negative impact on the country’s economic growth.

For example, as several commenters on the proposal have noted, Basel Endgame would make securitizations of mortgages, credit cards, auto loans, equipment leases and loans, and commercial loans more expensive for consumers and businesses that rely on such financing. As the broad Derivatives End User Coalition highlighted in its comment letter, Basel Endgame would increase costs and reduce the ability of non-financial corporations to hedge risks associated with currency fluctuations, commodity prices, and changes in interest rates, which would result in greater price volatility and higher costs to consumers for goods, services and everyday needs. Pension funds have noted that several aspects of the proposal would make it more difficult for them to generate returns for retirees, while multiple state and local government groups have expressed concern that it would increase the costs of issuing municipal debt, making it more difficult to financing. public infrastructure projects and increasing costs to taxpayers.

These dramatic capital increases related to the banks’ commercial activities also contrast with the approach taken in other parts of the world to the implementation of Basel III. For example, in the United Kingdom (UK) and the European Union (EU), authorities adopted more risk-sensitive approaches to key elements of the capital markets proposal, even though their economies are less reliant on financing. of capital markets and banking participation in those markets. is generally lower than in the United States. The UK and EU reforms are expected to result, respectively, in a 3.2% and 15% increase in aggregate capital levels for their global systematically important banks (GSIBs), compared to an increase of almost 30% in overall capital levels for the resulting US GSIBs. both the Basel Endgame proposal and the proposed changes to the GSIB surcharge.

US banking regulators should take a hard look at these figures and the range of analyzes shared by SIFMA and other stakeholders, and then make substantial changes to the Basel Endgame proposal. These changes include enabling greater recognition of risk diversification, creating stronger incentives for firms to adopt the FRTB internal modeling approach, and more appropriately tailoring capital requirements to the actual risks posed by certain products to avoid adverse impacts on key markets and end users. Most importantly, banking agencies should reduce the overcalibration of capital requirements that results from the overlap between the proposed new framework and the stress testing process.

The only prudent path forward would be for the agencies to re-propose the entire rule for public comment with a new 120-day comment period. Any new proposal must explicitly define the specific capital issues that need to be addressed and how a proposed solution would address them, and must be supported by sound economic analysis demonstrating the benefits and costs of the proposed changes. There is too much at stake for our economy to act hastily and get this critical regulation wrong.

Kenneth E. Bentsen, Jr. is the President and CEO of SIFMA, the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. From 1995 to 2003, Mr. Bentsen served as a member of the United States House of Representatives from Texas.

More must-read comments posted by Fortune:

The opinions expressed in Fortune.com comments are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.