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Basel Endgame Takes the Stand at Another Congressional Hearing

February 5, 2024

Last week, House Financial Services Subcommittee on Financial Institutions and Monetary Policy held a hearing to discuss recent proposals put forward by federal banking regulators with an emphasis on the Basel III Endgame. The subcommittee heard from a mix of industry advocates and academic witnesses.

Why it matters: The proposal, which would raise capital charges on banks with assets of more than $100 billion, has received bipartisan push back on the Hill. CREFC submitted a comment letter highlighting its concerns and led a joint letter from real estate industry groups.

Subcommittee Chairman Andy Barr (R-KY) highlighted the lack of analysis and justification for the wide-sweeping proposal:

“We have not seen any analysis of why the existing bank-capital framework needs to be overhauled or how the numerous proposals over the past year will work together or not,” Chairman Barr argued. “Rules without analysis lead to bad policy outcomes and invite mistakes.” 

What they’re saying: Echoing November’s hearing on the proposal, members from both sides of the aisle aired concerns regarding Basel Endgame’s impact on mortgage lending and renewable energy financing.

• GOP members added the proposal lacked a sufficient quantitative analysis and that it threatens the global competitiveness of U.S. banks.
• General consensus among GOP members was that the proposal should be scrapped, with Subcommittee Chairman Andy Barr (R-KY) arguing that “merely ‘recalibrating’ treatments of mortgages and green-energy tax credits” will not resolve lawmaker concerns or fix the other “fatal flaws” in the proposal.

Mortgage lending and clean energy.

• The Basel Endgame proposal received bipartisan push back for its impact on mortgage and small business lending. Reps. Brad Sherman (D-CA), Joyce Beatty (D-OH), and Greg Meeks (D-NY) all expressed their concerns, focusing in on the disproportionate effect the proposal could have on underserved and minority communities.
• Rep. Sean Casten (D-IL) reiterated his concerns with the proposal’s treatment of energy tax credits. While he supports the overall aims of the rule, he emphasized how the proposed increased capital requirement for tax equity investments could negatively impact renewable energy financing. 

“Let’s not pass the biggest climate bill in the history of any government anywhere that is meaningfully changing the deployment of clean energy in this country and then cut it off at its knees,” Casten said, referring to the Inflation Reduction Act. “Even though this is a small piece of the Basel III’s rules, it’s a big deal for the clean energy industry.”

Analysis and impact. Several GOP Members echoed Chairman Barr’s concerns and suggested scrapping the proposal due to a lack of quantitative analysis.

Competition. In his opening statement, Chairman Barr argued the Basel Endgame proposal will make U.S. institutions less competitive globally and “will chase activities outside of the regulatory perimeter for banks, posing threats to stability, functioning of capital markets, and abilities to hedge risks.”

• Bank Policy Institute President Greg Baer emphasized that a bigger concern than competitiveness should be a lack of capital markets liquidity.
• On the other side of the aisle, Ranking Member Bill Foster (D-IL) challenged competition concerns, asking witnesses if they believe requiring slightly higher capital requirements for large U.S. banks will make them uncompetitive and lose market share. Foster noted: “We had these predictions as we were writing Dodd Frank – that if we went ahead like this, we would be crushed by offshore competitors. That has not happened.”
• While most witnesses responded that the strain could make these banks less competitive over time, Professor Jeremy Kress argued that U.S. banks will continue to outperform their international competitors, “just as they did after the Dodd Frank Act in 2010.”

The bottom line: Congressional opponents of Basel Endgame will keep the pressure on regulators to revise the proposal now that the comment periods have closed. While the bipartisan opposition could lead to meaningful changes, withdrawing the proposal and re-proposing would be a drastic move.

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