The Federal Reserve has proposed controversial new bank capital rules, known as the “Basel III endgame”, which has sparked intense backlash from the banking industry and concerns even within the Fed itself over potential negative impacts. As the comment period nears its end, banks are gearing up for a major legal battle while regulators consider substantive changes.
Background of the Capital Rule Debate
The Basel Committee on Banking Supervision, a global standard setter, has introduced a series of reforms over the past decade, known as Basel III, to strengthen regulation of large international banks in response to the 2008 financial crisis.
The “endgame” refers to the final parts of Basel III focused on improving how banks measure credit, operational, and market risk. The proposed rules would require large banks to hold more capital as a cushion against losses and limit how much they can pay out in dividends and bonuses.
Proponents argue this will reduce systemic risk and prevent taxpayer-funded bailouts, but banks contend the reforms go too far, are flawed, complex, and could restrict lending to businesses and households.
Fierce Industry Backlash and Threat of Lawsuits
The banking industry backlash has been fierce, warning capital requirements could surge over 70% and curtail economic growth.
Top bank lobbying groups have called the proposal “fatally flawed” and are even considering suing regulators, which would be unprecedented.
“This would be declaration of war against our banking system by the Federal Reserve,” said banking analyst Brian Moylan.
The Futures Industry Association estimates clearing capital requirements could spike 80% under the reforms.
Rare Bipartisan Opposition in Congress
In a rare showing of bipartisan agreement, Democratic and Republican lawmakers have also voiced concern over the capital overhaul, demanding regulators perform an improved economic analysis.
“This rule threatens to seriously damage Main Street business lending,” said Senator Tim Scott (R-SC). “Pushing flawed regulations forward would be completely irresponsible.”
Signs of Compromise from the Fed
Facing mounting criticism, Federal Reserve leaders have recently signaled more openness to refining the hotly debated bank capital plan.
Fed Governor Michelle Bowman said in a January 17 speech regulators should make “substantive improvements” through the notice and comment process to address concerns over complexity, risk sensitivity, and impact on liquidity.
Vice Chair Michael Barr also acknowledged in January 9 remarks the proposal requires careful evaluation and that Fed economists are reviewing feedback about potential economic effects.
What Happens Next
The public comment period ends January 20, after which the Fed will need to sift through significant input from banks and lawmakers opposing the regulation.
Many experts believe the final rule will be watered down, but substantive changes could delay implementation beyond the January 2025 deadline. If no compromise can be reached, legal action from banks may be on the horizon.
“This will be a long battle that could go all the way to the Supreme Court,” predicts banking attorney Margaret Sultana. “The Fed is facing intense scrutiny like never before over this plan.”
Table 1: Key Dates in the Basel III Endgame Debate
| Date | Event |
|---|---|
| 2017-2019 | Basel Committee finalizes Basel III reforms |
| October 2022 | US regulators propose “endgame” capital rules |
| January 9, 2023 | Fed Vice Chair Barr signals openness to changes |
| January 17, 2023 | Governor Bowman calls for “substantive improvements” |
| January 20, 2023 | Public comment period ends |
| January 2025 | Proposed implementation deadline |
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