New Letter: ABA, 51 State Bankers Associations Outline Deep Concerns on Basel III Endgame Proposal

In a new letter to regulators today, the American Bankers Association and 51 state bankers associations expressed “deep concerns” about the proposed implementation of the Basel III Endgame capital regulations, which they said would have a significant impact on the availability of credit and essential financial services across the country.

“Our members firmly believe in a well-capitalized and innovative banking industry as a critical component of a strong national economy and a key support for the communities they serve,” ABA and 51 state bankers associations wrote in the letter. “Rather than enhancing our members’ ability to serve their customers and communities, however, we believe the Proposal would constrain the banking sector’s ability to provide credit and other essential financial services. Our review of the Proposal, and the widespread concerns that others have raised, convince us that your agencies have insufficiently assessed and considered the potential economic damage to bank customers and the economy as a whole.” 

The groups share the concerns that the agencies have relied on seriously insufficient supporting data and analysis to justify the significant increase in regulatory capital the Proposal would require and the resulting constraint on lending, and have failed to disclose those data to the public as part of the legally required process of notice and comment. They argue that these concerns “highlight the need to withdraw the Proposal and repropose a version with appropriate and transparent support.” 

ABA and the 51 state associations believe the Proposal will likely restrict funding availability in a number of key parts of the economy:

• Residential mortgages – proposed increases in risk weights for mortgages with higher loan-to-value ratios will have a disproportionately harsh impact on low- and moderate-income borrowers and first-time homebuyers.
• Capital projects – increased capital requirements for legislatively mandated or favored programs, such as tax equity investments in green energy and low-income housing.
• Credit for small- and medium-sized businesses – unsupported higher proposed risk weights for businesses that are not publicly traded, compared to those for public companies, will put privately held customers at an unreasonable disadvantage.
• Hedging instruments – increased capital requirements for derivatives and other hedging instruments will raise costs and risks for a variety of businesses that manage risks through hedging, from airlines to farmers and other agribusinesses. 
• Broad impact of operational risk capital charges – in addition to the risk weight changes already noted, a proposed capital framework for operational risk will raise capital requirements, and therefore costs passed through to customers, across the entire spectrum of ordinary banking activities.

“The potential impacts that concern our members would raise serious questions of regulatory policy in any circumstances, but the lack of justification is particularly pointed given the banking industry’s performance during and since the COVID-19 pandemic’s stress on the national economy,” the groups concluded. “As the Federal Reserve noted earlier this year, its annual stress tests demonstrated that the banks that would be subject to the Proposal are well positioned to weather a severe recession and continue to lend to households and businesses even during a severe recession. In these circumstances, the risks to the country’s ongoing economic prosperity far outweigh any benefits of the Proposal, which at best are uncertain and undemonstrated.”

Read the full letter.