What is the Basel III endgame and why are banks so angry about it?

An unlikely coalition of banks, community groups and racial justice advocates are urging federal regulators to reconsider the plan they proposed in July to update the rules that govern how U.S. banks protect themselves from potential losses.

Regulators are calling for an increase in the amount of capital – cash-like assets – that banks must hold to bail them out in an emergency and prevent them from needing a taxpayer-funded bailout as they did during the 2008 financial crisis. The collapse of three mid-sized banks and a fourth smaller one last year, under pressure from rising interest rates and losses by cryptocurrency companies, reinforced regulators' view that additional capital is necessary. Financial regulators around the world, including in the European Union and Britain, have similar standards.

Banks have long complained that holding too much capital forces them to be less competitive and limit lending, which could harm economic growth. The interesting thing about the latest proposal is that groups that traditionally do not align with the banks are joining the criticism. They include pension funds, green energy groups and others concerned about the economic fallout.

“This is the biblical dynamic: capital rises, banks scream,” said Isaac Boltansky, an analyst at brokerage firm BTIG. “But this time it's a little different.”

On Tuesday, the last day of the months-long period in which the public could provide feedback to regulators on the proposal, bank lobbyists made another attempt to have it scrapped. While there is no indication that regulators will completely withdraw the proposal, the barrage of complaints about it will likely force them to make major changes before it becomes final.

What are the objectives of the rules and why are they important?

The Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Monet — the agencies that will set the final rules — want to synchronize U.S. standards with those developed by the international Basel Committee on Banking Supervision. The commission has no direct regulatory authority, but regulators follow its guidance in the hope that agreement on the amount of capital major banks around the world must hold will help avert a crisis.

The new capital rules would only apply to institutions with $100 billion or more in assets — including 37 holding companies for U.S. and foreign banks. Some rules are even more specifically tailored to institutions that are so large that regulators consider them systemically important. Regulators and financial industry participants are calling the rules the “Basel III endgame” because they are the U.S. government's attempt to implement a 2017 proposal from the Basel Committee called Basel III.

If a version of the proposed U.S. plan is completed this year, the rules would come into effect in July 2025 and be fully operational in 2028.

Where do banks stand on this?

Banks have long worried about having to hold more capital to offset the risks of lending, trading and other day-to-day activities. They also oppose the latest 1,087-page plan. Industry efforts to defeat the proposal include websites like americanscantaffordit.com and stopbaselendgame.coma constant stream of investigative documents detailing the plan's shortcomings, influence campaigns on Capitol Hill and even threats to sue the regulators.

On Tuesday, two lobbying groups, the American Bankers Association and the Bank Policy Institute, filed a more than 300-page comment letter listing the ways in which the proposed rules could push lending activity into the shadow banking sector, reduce market liquidity and “significantly , permanent reduction in GDP and employment.”

Banks are particularly irritated by a proposal to protect themselves against the risks of mortgage loans. This option – it is one of several outlined in the plan but the one that has attracted the most attention – would force them to pay more attention to the characteristics of each loan and in some cases assign the loans a much higher risk score than they currently do.

They say the rule could cause them to stop lending to borrowers they don't consider safe enough. That could hurt first-time homebuyers and people without established banking relationships, including Black Americans, who regularly face racism from the banking industry.

Banks also say the rules would make it difficult for private companies to get loans by forcing banks to view them as riskier borrowers than public companies, which must disclose more financial information. Banks say many private companies are as safe as some public companies, or safer even if they don't have to meet the same financial reporting requirements.

Who else is angry?

Some liberal Democrats in Congress and nonprofits dedicated to closing the racial wealth gap are concerned about the plan's treatment of mortgages. Others say parts of the proposal could hurt renewable energy development by taking away tax breaks to finance green energy projects.

The National Community Reinvestment Coalition, which pushes banks to do more business in largely black and Hispanic neighborhoods where banks often have little presence, warned that parts of the proposal's “overly aggressive capital requirements are likely to make mortgages significantly more expensive for the lower-wealthy.” populations.”

Pension funds, which under parts of the proposal would count as private rather than public companies, say this would force banks to treat them unfairly as riskier financial market participants than they really are.

Are the concerns justified? And will they force regulators to change their plan?

There is no doubt that the regulators' final proposal, if they issue one, will be different from July's proposal.

“We want to make sure that the rule supports a vibrant economy that supports low- and middle-income communities, that the rule is properly calibrated on issues like mortgages,” said Michael S. Barr, the Fed's vice chairman for oversight. Jan. 9 at a financial industry event in Washington. “The public response we get on this is critical to getting it. We take it very, very seriously.”

Most observers believe criticism of the plan will force regulators to make substantial changes. But not everyone agrees that a future under the new rules is equally bleak. Americans for Financial Reform, a progressive policy group, argued in its comment letter praising the proposal overall that research has shown that banks more lent – ​​not less – when they had more capital in reserve.

Still, “there are more complaints about this from more groups than is normally the case,” said Ian Katz, a banking regulation analyst at Capital Alpha.

That could mean the banks are really onto something this time, even if their warnings of economic pain sound familiar. But, Mr. Katz said, the future is less predictable than the banks suggest. While some may withdraw from lending due to stricter capital rules, others may see an opportunity to increase their market share in the absence of former competitors.

“We don't know how individual companies would respond to this as a final rule,” he said.