BPI’s Greg Baer Testifies at Basel Hearing

Washington, D.C. - BPI President and CEO Greg Baer will testify today at a House Financial Services hearing titled "Prioritizing Main Street: Evaluating the Impact of Capital Proposals on Economic Growth and American Communities." Baer will discuss the U.S. banking agencies' recent capital proposals, the interactions between different elements of the capital framework and the effects on the economy and the financial system. The testimony comes shortly after banking regulators released revised Basel and GSIB surcharge proposals on March 19.

"These proposals reflect a new and cogent approach to capital regulation," Baer said in his written testimony. "The agencies focus on risk, assess it honestly and asset-by-asset and show their work. The agencies also allow for public comment and therefore the potential for further improvements in the proposal. The result will be a capital regime that better reflects risk and allows bank capital to be allocated more efficiently, with substantial benefits for lending and market intermediation and thus for U.S. economic growth."

Highlights of the Testimony:

• Strong Current Capital Levels: He outlines the robust levels of capital in the banking system after the Global Financial Crisis - resilience that surpasses the Fed's stress tests, real-life crises such as the COVID pandemic and academic estimates of optimal capital.
• Proposal Overlap: The testimony flags continuing concerns about overlaps between Basel capital requirements and the Fed's stress tests.
• Risk Calculation Approach: He outlines how the flawed assumption that risks in different areas (credit, market, operational) are perfectly correlated is counterfactual and may significantly overstate capital needs.
• The Great Migration: Baer describes the "great migration" of lending and financial intermediation away from banks and into the nonbank sector, partly as a result of punitive capital calibration.
• Shedding More Light, Boosting the Economy: Concurrent finalization of the recently released capital proposals "would remove almost a decade of uncertainty about Basel implementation in the United States and lift a veil of secrecy from the Federal Reserve's stress test," Baer said in written testimony. "Investors will be able to know what a bank's capital requirement is and project with confidence what it will be in the future - just like investors in any other type of company. For their part, banks will be able to engage in more thoughtful capital and business planning. As a result, banks' cost of capital will decrease, their ability to serve their customers efficiently will increase and the economy will benefit in an indirect but significant way."

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