Reduce Overlaps, Prevent Uncertainty: Basel Comments Roundup

Today, BPI filed (or co-signed) three comment letters in response to pending capital proposals from the federal banking agencies.

1. Basel Proposal. BPI led a joint trades letter on the Basel proposal alongside the American Bankers Association, Financial Services Forum, Consumer Bankers Association and U.S. Chamber of Commerce. The trades emphasized that the current proposal improves upon the 2023 version, but important changes are needed to eliminate overlapping charges in the framework and better align capital charges with risk. Those changes include:

• Mitigating overlaps between stress testing and Basel by applying a uniform 12% business indicator coefficient.
• Resolving overcalibration in the market and credit valuation adjustment frameworks.
• Retaining the current definition of "commitment" and "unconditionally cancelable" to prevent uncertainty that could harm business lending.

The trades also highlighted the big-picture implications:

• The 2023 Basel proposal garnered bipartisan, widespread opposition, with 97 percent of commenters objecting or expressing major concern.
• Overly high capital requirements harm economic growth.

2. GSIB Surcharge. BPI joined a separate comment letter led by the Financial Services Forum responding to proposed changes to the GSIB surcharge. The Federal Reserve's methodology (known as "method 2") to assign each Global Systemically Important Bank a risk-based capital surcharge is flawed, failing to account for over a decade of economic growth since its adoption. This results in surcharges that overstate the systemic risk of GSIBs, imposing costs on credit availability; the ability of large banks to provide essential liquidity and loans to the economy depends on efficiently calibrated capital requirements.

The letter recognizes the Fed's commendable effort to address the methodological flaws, but urges that:

• The adjustments fully reflect the inflation in GSIB scores since the original calibration period.
• The benefits of the FRB's recalibration efforts not be delayed by continued application of a flawed methodology.
• Any revisions to the indicators provide meaningful benefit to measuring or reducing systemic risk.

3. Standardized Approach. BPI co-led an additional comment letter with the ABA, joined by the U.S. Chamber and CBA on proposed changes to the standardized approach, one of two capital stacks from which large banks can choose.

• Context. The standardized approach sets capital requirements based on standardized risk weights across banks other than those who would be mandatorily subject to the proposed Basel-based Expanded Risk-based Approach (or smaller banks who opt into the Community Bank Leverage Ratio framework).
• Recommendations. The letter offers recommendations to improve the calibration and risk sensitivity of the proposed revised standardized approach. "In general, we appreciate the detailed explanations and impact analysis provided in the proposal, which have enabled us to more effectively evaluate the proposal and provide the recommendations in this letter," the trades wrote. "However, this letter also discusses issues arising from the proposed revisions to the definitions of 'commitment,' 'unconditionally cancelable,' 'traditional securitization,' and 'synthetic securitization,' which we strongly urge the agencies not to finalize in light of the ambiguity these proposed changes would create and the unassessed-and unassessable-effect they would have on firms' capital requirements. Apart from these changes, we encourage the agencies to finalize the proposal expeditiously, so firms and the broader economy can benefit from the improved risk sensitivity in the revised standardized approach."