Basel Proposal is a Step in the Right Direction

The banking agencies' Basel capital proposal is an improvement from the 2023 proposal, but changes that eliminate areas of overcapitalization and better align capital charges with risk are needed, the American Bankers Association and other trade associations said in a comment letter today. The letter was signed by ABA, the Bank Policy Institute, the Financial Services Forum, U.S. Chamber of Commerce and the Consumer Bankers Association.

The joint trades issued the following statement upon filing the letter:

"This proposal represents a significant improvement over the previous version. It takes a big-picture view of the capital framework, seeks to simplify the framework's design and better aligns capital requirements with risk. The depth of its supporting economic analysis is also a welcome step forward. However, some overlapping requirements remain, leading to excessive capital charges for certain risks. Our recommended changes would further improve risk sensitivity and reduce unnecessary complexity, advancing the proposal's stated goals. The changes will ultimately benefit bank customers and the economy while promoting a sound banking system."

Context. The current Basel proposal culminates more than a decade of work to standardize bank capital requirements after the Global Financial Crisis. During that time, banks have accumulated robust capital levels and become subject to stringent regulatory mandates.

• The 2023 Basel proposal garnered bipartisan, widespread opposition, with 97 percent of commenters objecting or expressing major concern. It proposed arbitrarily high capital charges disproportionate to the risk of certain assets, failed to justify its calibration with economic analysis and failed to consider overlaps with the stress tests or gold-plating in the U.S. capital framework.
• Overly high capital requirements harm economic growth. A review of the academic literature by the Basel Committee on Banking Supervision found that a 1-percentage-point increase in capital requirements reduces annual GDP by up to 16 basis points. This equates to a loss of about $42 billion in U.S. output per year.

Recommendations.

• Mitigate Overlaps.
  • Mitigate the overlap between the stress capital buffer and the proposal in terms of operational risk by applying a uniform 12% business indicator coefficient.
  • Revise the market risk and credit valuation adjustment frameworks to resolve the over-calibration for these risks resulting from the overlap between the stress test and the proposal.

• Eliminate Newly Introduced Ambiguity.
  • Retain the current definition of the terms "commitment" and "unconditionally cancelable." The proposed "clarification" to these definitions is ambiguous, would introduce significant additional uncertainty into the capital framework, and would result in an unquantifiable and unanalyzed increase in capital requirements. This uncertainty could have a negative effect on business lending.

• Encourage Banks' Participation in the Mortgage Market.
  • Reduce the risk weight for appropriately hedged mortgage servicing assets from 250% to 100%.

• Consider Implementation Timing.
  • Impose a required implementation date of no earlier than Jan. 1, 2028, allowing sufficient time for banks to implement the requirements, while allowing banks to adopt it earlier.
  • Consider interactions and timing implications between the effective date of the proposal and the forthcoming stress test rule.

Media Contacts:

American Bankers Association
Jeff Sigmund
[email protected]

Bank Policy Institute
Tara Payne
[email protected]

Financial Services Forum
Laura Peavey
[email protected]

Consumer Bankers Association
Weston Loyd
[email protected]

U.S. Chamber of Commerce
Jeff Guittard
[email protected]

About the American Bankers Association
The American Bankers Association is the voice of the nation's $26.1 trillion banking industry, which is composed of small, regional and large banks that together employ over 2 million people, safeguard $20.5 trillion in deposits and extend $13.7 trillion in loans.

About Bank Policy Institute
The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations and represents the financial services industry with respect to cybersecurity, fraud and other information security issues.

About Financial Services Forum
The Financial Services Forum is an economic policy and advocacy organization whose members are the eight largest and most diversified financial institutions headquartered in the United States. Forum member institutions are a leading source of lending and investment in the United States and serve millions of consumers, businesses, investors, and communities throughout the country. The Forum promotes policies that support savings and investment, financial inclusion, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.

About Consumer Bankers Association
The Consumer Bankers Association represents America's leading retail banks. We promote policies to create a stronger industry and economy. Established in 1919, CBA's corporate member institutions account for 1.7 million jobs in America, extend roughly $4 trillion in consumer loans and provide $275 billion in small business loans annually. Follow us on X @consumerbankers.

About the U.S. Chamber of Commerce
The U.S. Chamber of Commerce is the world's largest business organization representing companies of all sizes across every sector of the economy. Our members range from the small businesses and local chambers of commerce that line the Main Streets of America to leading industry associations and large corporations. They all share one thing: They count on the U.S. Chamber to be their voice in Washington, across the country, and around the world. For more than 100 years, we have advocated for pro-business policies that help businesses create jobs and grow our economy.

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About the American Bankers Association

The American Bankers Association is the voice of the nation's $26.1 trillion banking industry, which is composed of small, regional and large banks that together employ over 2 million people, safeguard $20.5 trillion in deposits and extend $13.7 trillion in loans.