Basel endgame will greatly disadvantage international banks in the U.S.

Robert Cicchetti - stock.adobe.com

The Basel III endgame proposal threatens to create an uneven playing field for the U.S. operations of international banks which, left unchanged, could result in less investment, less liquid markets and less competition in the U.S. financial system. 

In the United States, internationally headquartered financial institutions hold more than $4 trillion in assets, directly employ approximately 200,000 people and represent a majority of the primary dealers in the U.S. Treasury market. According to the most recent data available from the Federal Reserve Board, they also made $661 billion in commercial and industrial loans in the United States in the first nine months of 2023 alone. Further, these institutions are often the primary facilitator of investment in the United States by international companies, which has helped transform many states in the U.S., particularly in the Southeast.

The contributions of international banks to the U.S. economy, however, could be significantly impacted if changes are not made to the proposed U.S. Basel III endgame rule.

It's important to acknowledge that international banks are already subject to rules set by their home country regulators. Several decades ago, Congress recognized this reality and enshrined the doctrine of "national treatment," which requires federal banking agencies to treat the U.S. operations of international banks no less favorably than domestic banks of similar size and business profiles. This helps ensure America's financial markets are competitive.

But under the Basel III endgame proposal, the U.S. operations of international banks will see a capital increase on their U.S. activities that is more than double that of domestic banks of similar size.

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The disparate treatment for international banks stems in part from the fact that the Basel standards were designed to be applied to the global consolidated level of a bank. The way in which the U.S. banking agencies propose to apply the Basel standards at the subsidiary level in the United States, however, will result in capital requirements that do not match the risk presented by these entities and their activities.

The most significant area for improvement is the proposal's standardized "operational risk" component. The operational risk component was designed to apply only at the parent consolidated level. Unfortunately, the U.S. banking regulators have decided to diverge from this approach in the proposed rule.

Further, certain aspects of the current Basel III endgame proposal would penalize international banks for providing nonfinancial services to their parent and other non-U.S. affiliates, resulting in disproportionately unfavorable treatment for those institutions vis-a-vis their domestic counterparts. In addition, the Basel III endgame proposal also includes other U.S. "gold-plating" and adjustments in the U.S. market risk and credit risk framework that could further harm international banks along with their U.S. counterparts.

U.S. financial markets are stronger and more resilient because of the contributions of international banks. But many aspects of the Basel III endgame proposal threaten to tilt the playing field against them. 

Gold-plating of internationally agreed to standards harms all financial institutions — both U.S. and non-U.S. banks — and is contrary to the goal of these standards, which seek to minimize differences in international capital frameworks. U.S. regulators should work to mitigate the uneven impacts to best promote a strong financial system and robust U.S. economic growth.