Hearing highlights split in support for ‘Basel III endgame’ bank rules

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A partisan divide between US lawmakers was on display on Wednesday over whether new international rules intended to prevent another global financial crisis would provide a buffer for banks or improperly weigh down the sector and constrain lending in the economy.

The US implementation of the so-called Basel III endgame for banking standards was a central topic of discussion at a Senate banking committee hearing in which the chief executives of the eight largest US banks, including JPMorgan Chase, Goldman Sachs and Citigroup, testified. 

The chief executives have argued that the proposals, which are still being debated, would force banks to hold more capital at a time when they are already subject to high requirements, and would result in them making fewer loans.

Sherrod Brown, the Democratic senator from Ohio who chairs the committee, pushed back against the executives, telling them that “absolutely nothing in these rules would stop your banks from making loans to working families, to veterans, to homeowners, to small businesses”.

“The reason banks might make fewer of these good loans in the future is the same reason we’ve been seeing less and less productive banking activity for years. It doesn’t make your banks as much money as the risky stuff,” Brown said. 

Mark Warner, the Democratic senator from Virginia, expressed some scepticism about the Basel proposals and their impact on access to credit but said he was nevertheless “extraordinarily frustrated” by the banks.

“Any time there is any proposed new regulation or rule, the normal reaction is ‘Oh my god, the sky is falling.’ And the same response is always, ‘You do this, it’s going to limit access to capital on Main Street,’” Warner said. 

But a group of Republican senators expressed support for the banks’ position, including Tim Scott, the top Republican on the committee, who said the Basel rules risked having “a devastating impact” on the access to credit for lower-income Americans.

“These consequences will create a ceiling for low-income Americans, and it won’t be a ceiling made of glass. Instead, it will be made of concrete. We simply can’t let that happen,” Scott said.

Bill Hagerty, a Republican senator from Tennessee, blasted “the regulatory class in Washington” over what he described as “an unwillingness or refusal to take into account the knock-on effects of the regulations”.

US banking regulators announced the new Basel rules in July, with estimates that they would increase the capital requirements for the country’s largest banks by about 20 per cent. Capital is used by banks to absorb potential losses.

Banks have argued that the proposals, which came just months after three of the largest US bank failures in history, go too far and do not adequately reflect the extra capital standards they have already had to follow since the 2008 financial crisis. They argue it would push more lending outside of the regulated banking sector. 

Regulators will accept comments on the rules until January 16, after which time they may make changes to the proposals.

The banks’ lobby groups have also undertaken an extensive advertising campaign against the Basel endgame proposals, going so far as to broadcast a TV advertisement during a highly watched American football game last month.