The Basel III Endgame proposal “is not just the total capital it raises on the overall bank, but again, what it does on the capital market side and then how it interacts with existing prudential requirements and liquidity requirements such as things like the stress test and something known as the global market shock”, said SIFMA President and CEO Kenneth E. Bentsen, Jr. in an interview with BloombergTV’s Romaine Bostick and Scarlett Fu. “And when you put those together with this proposal,” he continued, “you really do impede capital markets activities of the large dealer banks.”

Romaine Bostick: I am curious, Ken. I mean, I was going through some of the transcripts from what you guys talked about yesterday, and no surprise, there are a lot of folks still concerned. But I wonder if you could kind of square that circle because you have some folks on the kind of fringes of finance right now that are still fighting to block some of these rules. But then you hear from folks like Steinhauer over in Huntington, who I guess is just kind of resigned to it is like this is going to happen. We need to prepare for it here. Is there some sort of middle ground here that we should prepare for? Are there going to be changes?

Ken Bentsen: Well, I think if we take first of all, thank you for having me on. I think if we take Chair Powell at his word and I do that, they’re going to be substantive in material changes to the rule. I think a rule proposal, I think that’s a good thing and even possibly a re-proposal which Chairman Powell didn’t rule out and if you saw our panel yesterday, Governor Bowman from the Fed said there should be a re-proposal.

We think there should be a re-proposal. And I think the difference in Huntington is a fabulous institution, by the way. I think the difference is what type of business is your bank in. And in the larger dealer? Banks are really negatively affected by this. So I think most large banks, if not all, all large banks in the U.S., including from Huntington on up, certainly have very high capital levels well before the Basel three proposal was put out. It’s the structure of their business.

What we’re particularly concerned about is the impact on the capital markets business. And if you look at particularly the U.S. G sibs, they are dominant players in the U.S. capital markets business along with the foreign G sibs, and that’s going to be very negatively impacted by the proposal with capital charges going up as much as 130% on traditional products like securitization or securities financing transactions. So that’s really where people need to focus.

Romaine Bostick: And I think a lot of people are focusing on that. Ken, just to play devil’s advocate, though, I think some of the folks who backed this proposal, which was formally unveiled last year, look at it and say, look, this is about making the financial industry safer, preventing bank failures or at least sort of, you know, trying to sort of stem the potential for those failures here as this proposal stands right now, does that not do that?

Ken Bentsen: Well, I’d start with the premise that we’ve made the system more stable to where we are today. This Basel III Endgame proposal has been ten years in the making, but over that time we’ve seen bank capital grow exponentially in the U.S. And so I think in terms of aggregate capital, you know, we’ve really hit the target of where we should be.

What the problem with this proposal is not just the total capital it raises on the overall bank, but again, what it does in the capital

market side and then how it interacts with existing prudential requirements and liquidity requirements such as things like the stress test and something known as the global market shock. And when you put those together with this proposal, you really do impede capital markets activities of the large dealer banks. And the problem with that is we fund 75% of commercial activity in the U.S. through the capital markets. So that’s a good thing, but that’s going to have a transmission effect. If you raise capital costs by the level that’s being talked about, the way this rule plays out. So that’s why it definitely needs, frankly, in our view, a re-proposal.

The Fed and the prudential regulators are only now doing a quantitative impact study, which they should have done before this proposal. They need to put that out for comment. We believe they will and they really if they are going to make material changes, they need to put the whole proposal out for additional comment.

Scarlett Fu: So this is ten years in the making. The Fed has already made clear that there will be changes. You were talking about a re-proposal. Is the goal here to just not propose anything to kind of keep what we have?

Ken Bentsen: I think the goal here is to get it right. And if you think about it in terms of how Basel III Endgame, how the iterations of it, the Basel committee itself went through a re-proposal because they put out an initial proposal, they did a quantitative impact study, they realized that they needed to do another. Then they went and re-proposed and rewrote the proposal. It was supposed to be a capital neutral proposal and really trying to equalize capital across jurisdictions around the globe. But what the Fed and the other agencies have come out with doesn’t do that. So a re-proposal is a process of getting it right. It’s not unprecedented at all. And frankly, I think if the agencies had done their quantitative impact study on their proposal before they put this out, it would have been a better place. But it again, it’s about getting it right, not getting it done fast.