- Key insight: Regulators' proposed changes to the definition of a commitment could eliminate the standard banks have used since the 80s to determine which lending arrangements are in scope.
- What's at stake: The change could pull wholesale products like small business lines of credit into a category that might increase capital requirements for large banks, and cause reporting headaches for smaller institutions.
- Forward look: The commitments definition is expected to be among banks' top priorities in comment letters to regulators due Thursday.
WASHINGTON — A Trump-era change to capital rules could upend how banks treat their wholesale lending books.
In the
"While it may be that there's not much public on this, this has been a very significant issue for banks," said Matthew Bisanz, a financial regulatory partner at Mayer Brown. "We've been drafting comment letters for about half a dozen trade associations, and this is one of the top items for them, so it is certainly a big deal."
When extending lines of credit, banks have to determine whether the arrangement is a "commitment," where they have promised to lend a specific amount under defined terms. They then ask whether the line of credit is unconditionally cancellable, meaning the bank can terminate the customer's ability to draw funds at any time. In practice, this category is dominated by credit card and home equity improvement lines, or HELOCs, where customers can draw automatically unless the bank actively shuts off the line.
It goes on banks' balance sheets that way, and capital requirements are determined based on size and complexity of those balance sheets.
Banks don't necessarily record wholesale lending in the same way, for example, as in their small business lending books.
For a small business loan, a bank might extend a $20,000 line of credit but tell the business that they have to get specific permission from the bank to draw on it. Or, the bank might put up conditions before offering the loan in the first place.
With the most recent Basel changes, banks worry they will have to pull back on those advised lines of credit like small business lending, or risk holding additional capital for them.
The change that the Basel proposal would make effectively eliminates the boundary of what qualifies as a commitment, three people familiar with the banks' thinking said. Without the legal-obligation standard, bankers are anxious that there will be no clear way to determine which arrangements are in or out of scope.
"Regulators are expanding it to this broader idea of, even if there isn't an explicit legal obligation to extend credit, maybe there are arrangements that are so close to that that they should be picked up," Bisanz said. "I am hopeful that the regulators will accept that like this is not something that they need to to tackle, there's no problem here that's being fixed."
For the largest banks, this change would affect their capital requirements because of the expanded risk base, one of the people said. For midsized banks, the change would still have an impact because the definition is used in the standard leverage ratio, and for even smaller banks, the new definition would still have reporting implications.
The commitment issue is just one that banks raised in comments on the Basel III endgame proposal, which are due just before midnight on Thursday. Overall, bankers are happy with most of the proposal, especially compared to then-Vice Chair for Supervision Michael Barr's 2015 version.
"We went from huge issues of
Other issues for banks — although mostly the very largest ones — include changes to the surcharge pitch for global systemically important banks, or G-SIBs, and risk weighted assets calculation, part of which JPMorgan CEO Jamie Dimon has complained about publicly.
"While we can accept that some level of surcharge is appropriate, given our position in the market, the proposed level just seems to punish our success, our strength, our consistency and our balanced business model," Dimon
Mills expects regulators to hold to the majority of their proposal, but that banks might get two or three wishlist items changed, one of which could be the commitments problem.
Part of the reason for this speed is because of upcoming midterms, and pressure to pass Republican priorities as quickly as possible before Washington potentially changes hands.
"They're going to want to push forward as quickly as they can to avoid congressional oversight that will potentially change or modify their particular approach," said Peter Dugas, CEO of Regulatory Intelligence Group. "Really, they're running against the clock, that's both the political and the regulatory reality of the rule making process."
