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Bloomberg Markets: Basel III Rules Will Have Knock-On Effects

The Basel III endgame proposal will negatively affect large banks’ trading activity, with larger effects for the wider economy, SIFMA President and CEO Kenneth E. Bentsen Jr. said in an interview with Bloomberg. As well as increasing capital requirements, the proposal “will have serious knock-on effects into the price that firms have to pay, whether it’s for financing equipment, financing mortgages, expansion and growth in plant equipment,” Bentsen said. “The Fed and the other regulators did not do a quantitative impact study before they put this proposal out. They’re doing one now … and they really need to reopen for comment once they release” the study, he added.

Transcript

Romaine Bostick: Ken, let’s get right to it here. I mean, you’re not alone in that sentiment here. I mean, we just a couple of days ago, I think it was yesterday, actually, if I remember correctly, we heard from Governor Michele Bachmann really talking about some of the proposals out there, at least coming from the U.S. side and the idea that they really needed to be rethought. And more importantly, it might be some time before we really get to a point where we can have something definitive on the table.

Ken Bentsen: Well, I mean, first of all, thank you for having me. And I want to go back to something you just said about the meat and potatoes of the financial system. And we represent the capital markets area of the financial system. And in the U.S., that is the meat and potatoes of how non-financials are financed, whether it’s large companies, small companies, consumers, investors, etc.. And the problem with this proposal was multiple problems. One, it’s highly complex. Two, it has a dramatic increase in capital, just not on large banks, on their overall capital, but on their trading activity, which again is the meat and potatoes of our financial system.

So it has a serious will have serious knock on effects into the price that firms have to pay, whether it’s for financing, equipment, financing, mortgages, expansion, growth in plant and equipment and so that’s number one. Number two, the process is not very good at all because as pointed out, as you point out in our comment letter, it’ll have a 129% increase in trading book capital to begin with. But, the Fed and the other regulators did not do a quantitative impact study before they put this proposal out. They’re doing one now, which is great, but they really should have done it beforehand and they need to reopen for comment once they release the quantitative impact study. We did our own quantitative impact study. That’s why we came up with their numbers and we’re pretty confident that’s what they’re going to find as well.

Romaine Bostick: But I am curious, I mean, some of the folks who are in support of these increase capital requirements really focus in on this idea of how do you identify, I guess, what’s risky or what has systemic risk on the balance sheets of these companies, how big these speculative sides of these businesses are? The proposal, at least as we know it to be now, do you think that addresses it in a fair enough way?

Ken Bentsen: Well, let’s remember, over the last decade, we’ve seen capital increase threefold and liquidity increase ninefold for the large financial institutions that are impacted by this. And we’ve gotten through really quite well. Second, the proposal was put out as having only going to increase capital by 2% or up to up to 20%, I should say, overall. It was suggested that trading book capital increases really weren’t important because they didn’t affect Main Street economics. But in fact, in the U.S. they do mean Main Street finances itself through the capital markets in the U.S. And so this is going to have a really broad knock-on effect particularly when you consider the fact that the banks that are impacted by this have 50% of market share in traditional securities products, whether it’s derivatives, securitization, corporates, munis, treasuries and the like. And when you add in the foreign banks that are also impacted by this, you’re talking about 90% market share. So then you have a question of where the capacity is to fund it, and the only result’s going to be increased cost. So we think that you really have to go back and start over and to start. The first thing to do is to do a quantitative impact study like we did, which now they’re doing. But I think they’re going to have to re-propose once they put that study out.

Romaine Bostick: Well, it seems like you have a couple of allies sort of on the inside who kind of agree with you. But my question is, how much have you spoken with them, particularly about the differences and the disparities in data? And how do you reconcile that? How do you go to them and say what you’re looking at is wrong? What we’re looking at is right or at least gives a more accurate representation of what’s going on?

Ken Bentsen: Well, we certainly have been weighing in with the Fed, the Comptroller of the Currency, and the FDIC on this. And we did decide to do our own quantitative impact study because they had not done one. They’re doing one now and we look forward to going back in and showing them that we’ve now presented them our numbers when we filed our comment letters this week. And we’re eager for them to go in and review our numbers with them, we feel quite confident that they’re going to find the same thing we did. And it’s a stark difference to what they thought that the proposal was going to be. So it does underscore the need that some of the governors you mentioned have raised that they need to start over.

Romaine Bostick: We only have about a minute left, Ken, I am curious here for the folks who are advocating for these higher capital requirements, they say that, look, you raise the capital requirements, the banks pull back, but there will be enough money and enough players out there in the private side of this who will sort of pick up the slack. Do you not buy that?

Ken Bentsen: I don’t buy that because when you look at the market share that the U.S. producers have and the foreign subs have, they’re impacted by this proposal. You’re talking about 90% market share in traditional securities financing. And yes, there are others certainly we represent all of the players in the capital markets, all the major players in the capital markets area, but that’s a lot of capacity to be impacted. It’s really nonsensical not to think that it’s going to have a knock-on on effect into pricing capital allocation. And that affects mainstream financing.

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