In this episode of The SIFMA Podcast, SIFMA’s Chief Operating Officer Joseph Seidel sits down with Dr. Peter Ryan, Managing Director, and Head of International Capital Markets and Strategic Initiatives, to discuss the status of the Basel III Endgame proposal in the United States. A recent study found that the proposal would cause U.S. economic growth to decline by up to 56 basis points – equivalent to a 25% reduction in the U.S. compound annual growth rate. While there is uncertainty around the regulatory process that lies ahead, it is clear that the rule will not be implemented by its July 2025 deadline. This discussion dives into the proposal’s implications for the U.S. capital markets and the broader economy, and the need for material – and necessary – changes in the form of a complete re-proposal.

Transcript

Edited for clarity

Joe Seidel: Thank you for joining us for this episode of SIFMA’s podcast series. I’m Joe Seidel, SIFMA’s Chief Operating Officer. I’m joined today by my colleague, Peter Ryan, Managing Director, and Head of International Capital Markets and Strategic Initiatives, to talk about the latest with the Basel III Endgame proposal. We’ll talk about its implications for the U.S. capital markets and broader economy, and the prospects for material – and necessary – changes to the proposal.

Last time we chatted, we had just wrapped up a robust roundtable discussion where we heard from diverse stakeholders about their views of the proposal, and in most cases, their concerns. For example, – many noted just how unprecedented this proposal is in its scope and scale, and how it deviates so clearly from the original intent of the internationally agreed Basel III reforms. Most participants expressed the need for the policymakers to pursue a full re-proposal of the reform package. The expression of those types of concerns has continued unabated – including from key regulators themselves, which I want to talk about in a moment. But before we do, Peter, will you just give us the cliff notes version on where we are in the process here and our industry’s main concerns?

Peter Ryan: Thanks, Joe. In brief, the banking agencies proposed the Basel Endgame rule last July. There was widespread criticism that the proposal was unsupported by a comprehensive, up-to-date quantitative impact study or QIS, which is why the agencies agreed to gather quantitative data from the firms in October of last year.

The comment period on the proposal ended on January 16^th of this year, and the response was overwhelmingly critical. There were 365 comment letters submitted – an unusually high number for a banking rule – and those letters came not just from the banking industry, but from corporate end-users, asset managers, insurers, issuers of state and local municipal debt and many others, as well as comments from elected officials across the political spectrum.

In fact, a Latham and Watkins analysis of the comment file found that 97% percent of the comments either opposed the rule and called for its re-proposal OR expressed substantial concerns with critical elements of it. Since then, there have been a number of congressional hearings that have highlighted concerns from both Republicans and Democrats about the proposal’s potential impacts on consumers and businesses. The Federal Reserve has also signaled it plans to release the results of its QIS exercise for public comment, which we are still waiting to see. And, as I know we’ll talk about, there are signals that they could be a re-proposal of the rule.

Overall, though, there is quite a bit of uncertainty around the process moving forward. The one thing that is nearly certain, however, is that the rule will not be implemented by the July 2025 deadline contained in the original proposal.

Then just to quickly recap our high-level concerns with the Basel Endgame framework as proposed:

• The proposal would significantly increase capital requirements, particularly for banks’ capital markets and trading activities.
• In fact, the latest industry quantitative impact study estimates that capital for large banks’ trading activities would increase by 129% over their current historically high levels.
• And that will have a major impact given how critical the U.S. capital markets are to U.S. economic activity, funding, as you know, three-quarters of equity and debt financing for corporations and facilitating prudent business risk management by a wide variety of end-users.
• The result of these sweeping capital increases would be reduced availability of key services and higher transaction costs for businesses, consumers, and government entities, a fact that was highlighted in the hundreds of critical letters on the proposal.

Joe Seidel: Ok, and there is new research out from PWC that – in pretty stark terms – outlines the possible impact on the economy if the Basel Endgame is implemented as proposed. Peter, what did this study set out to look at and what are the key findings?

Peter Ryan: The PwC study evaluated the macroeconomic and microeconomic impacts of the Basel Endgame proposal. In terms of macroeconomic impacts, the study found that the proposal would cause U.S. economic growth to decline by up to 56 basis points – equivalent to a 25% reduction in the U.S. compound annual growth rate that we’ve experienced over the past 10 years. In terms of microeconomic impacts, PwC focused on key products and asset classes that have an essential role in how consumers and corporate borrowers access credit and hedge their risks. The study found that an increase in capital requirements will lead to reduced lending, higher borrowing costs, and reduced access to risk management tools such as derivatives hedging. The PWC study also observes that the proposal would raise the costs of certain types of transactions for U.S.-based institutions in ways that would not apply to firms operating overseas. This, in turn, would undermine the entire point of the Basel standards, which is to ensure that there are broadly consistent global capital requirements in place for large banks. And because of this divergence, the U.S. proposal would also create a misalignment of risk, with capital requirements for the many types of risks differing across jurisdictions.

I’d also note that a prior PwC report found that large U.S. based banking organizations are currently operating at – or near – what is considered to be the “optimal” level of capital – that is a level that is high enough to ensure that the banking system is protected against severe risks, but no so high that it begins to constrain economic growth. All of this raises the question of what the agencies are looking to accomplish here – the downside economic risks of radically increasing capital requirements at this time would be high, while the safety benefits to the financial system would be marginal at best. In our view, a better approach would be to make the necessary reforms to the different risk-based frameworks in a broadly capital neutral manner.

Joe Seidel: Exactly – which is why so many are calling for a full re-proposal. Now let’s talk a bit about the public comments we’ve heard from the likes of Federal Reserve Chair Jay Powell and FDIC Vice Chair Travis Hill on re-proposal. What have they been saying?

Peter Ryan: Yes, so it does appear that some leading regulators have heard these concerns. For example, in his House and Senate testimony in July, Federal Reserve Chair Jerome Powell stated that he and some other Federal Reserve Board members strongly favor putting a revised version of the Basel Endgame capital proposal out for public comment, though it is unclear if Chair Powell is envisioning a a complete re-proposal or something short of that.

And just last week, FDIC Vice Chairman Travis Hill said the Basel III Endgame needed to be amended in “broad, material, and rational” ways, and that the only way to do that was through a complete re-proposal for public comment.  He also noted that the current proposal “lacked appreciation for its real-world impacts” – real-world impacts such as those identified in the recent PWC study we just discussed – AND made clear that these economic impacts on consumers and businesses needed to be addressed in a re-proposal.

Joe Seidel: Now this view of the importance of a re-proposal may not be universal among the banking regulators, so where does that leave us? What’s likely to happen next?

Peter Ryan: The short answer is we don’t know exactly if or when a re-proposal of the rule will be published, or what form it will take.  But we continue to believe the most prudent path is a full re-proposal of the Basel Endgame that covers all the so-called “risk stripes” in the proposed framework, including credit, operational, and market risk. A full re-proposal is also the best way to ensure that there is broad consensus around the final rule and will help ensure that it is a framework that is built to last.

It’s also crucial that the banking agencies consider first whether the U.S. banking system really needs significantly more capital beyond current levels (and if so, how much more is required)? and then second, what are the relative costs and benefits to the broader economy, businesses and consumers of making these changes? That’s crucial here, because the real-world economic costs of getting this wrong are just too high.

Joe Seidel: I totally agree Peter, and I think that is a good place to end our conversation. Thank you to our audience for listening today and Peter, thank you for your insights. To learn more about SIFMA’s work in the capital space and beyond, please visit sifma.org.

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Joseph Seidel is Chief Operating Officer of SIFMA. 

Peter Ryan is Managing Director and Head of International Capital Markets and Strategic Initiatives, SIFMA.

Related Resources

• The SIFMA Podcast

  Why the Basel III Endgame Must Be Re-Proposed

• SIFMA Blog

  Basel III Endgame Blog Series