Basel committee has outsize influence over American banks

The capital standards adopted by the Basel Committee on Banking Supervision have wrongly taken precedence over the authority invested in Congress to legislate and determine the appropriate capital requirements for American banks. The voluntary consortium of international banking regulators dictates domestic banks' capital requirements even though it possesses no supranational authority or legal force.

Congress should be the sole entity authorized to direct how American banking regulators promulgate rules that minimize leverage, enhance capital loss absorption and ensure a vibrant allocation of capital to individuals and businesses.

Al Drago/Bloomberg

The Basel committee, which is governed by the Bank for International Settlements and chaired by banking regulators from around the world, possesses no legal authority in the United States. Although the committee's charter states that it is the "primary global standard setter for the prudential regulation of banks," it also makes clear that it "does not possess any formal supranational authority. Its decisions do not have legal force."

Federal regulators have prioritized the committee's most recent set of standards, known as Basel III," over congressional directives. The regulators' proposed rulemakings from 2012 primarily implemented "certain aspects" of Basel III and "other revisions" based on a "series of documents between 2009 and 2011" by the Basel committee. Attempting to portray a semblance of congressional approval, the rule goes on to say it "would also address relevant provisions" of the Dodd-Frank Act.

Clearly the primary focus of the rule was to incorporate the Basel framework. Legislation passed by Congress was an ancillary consideration.

Michael Barr, the vice chair for supervision with the Federal Reserve's board of governors, refuses to loosen capital requirements. In a speech at the American Enterprise Institute last month, Barr dismissed any consideration of lowering capital requirements because it augurs a "race to the bottom."

Barr neglects to discuss any costs associated with higher capital requirements. One study shows that "for every 1% increase in capital minimums, lending rates will rise by 5 to 15 basis points and economic output will fall 0.15% to 0.6%." In the long run, higher capital requirements may also "reduce competition by acting as an entry barrier for new banks."

A more holistic understanding of the effects of higher capital requirements on the broader economy is needed before the Fed and other regulators continue to draft rules that may inhibit capital allocation.

Barr also admits his dedication to implementing additional reforms from Basel III at the expense of congressional consideration of proper prudential regulations. Although Barr understands that the Fed and other banking regulators must undergo the formal rulemaking process under the Administrative Procedure Act, he fails to mention the role Congress should play in prudential regulation, and instead, commits to drafting "the U.S. version of the Basel III endgame reforms" along with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

The Fed's annual stress tests, which account for operational and market risks, base their common equity Tier 1 capital ratio off of Basel committee standards instead of direction from Congress. This is a clear example of the committee circumventing elected representatives and directly imposing policies on American regulators that could end up restricting access to capital for all Americans.

AB - Policy & Regulation

Fed, FDIC, OCC commit to implementing Basel III endgame 'as soon as possible'

September 9, 2022 2:10 PM

The Supreme Court's ruling in West Virginia v. EPA weakens any future rulemaking that supersedes congressional authorization. The precedent set by this ruling could make it more difficult for federal banking regulators to promulgate regulatory capital rules without "clear congressional authorization." The reassertion of the major questions doctrine in the ruling addresses the problem of "agencies asserting highly consequential power beyond what Congress could reasonably be understood to have granted."

The Fed, FDIC and OCC should seek statutory guidance from elected officials instead of the amalgamation of largely non-American banking regulators in Basel, Switzerland.

The implications of the Basel III standards and subsequent regulations have economic and political significance for the broader American economy. Because they are aiming to "regulate a significant portion of the American economy" specific congressional authorization is needed. Explicit direction from Congress is necessary to help "preserve the separation of powers" and to serve "as a vital check on expansive and aggressive assertions of executive authority."

Future consideration of capital requirements should be deliberated among elected officials. Congress must take the helm to ensure that bank capital requirements avoid the Basel committee's restrictive and slapdash "race to the top."