As the European banks protest the Basel Committee on Banking Supervision's completion of its Basel III postcrisis capital framework, the U.S. banking industry appears to be optimistic that domestic regulators will take a softer approach to the new rules.
Under the updated capital framework, dubbed "Basel IV" by the banking industry, companies would face a limit on the use of internal risk modeling through an "output floor," at which the company would have to hold at least 72.5% of capital against risky assets recommended by standard models. Basel IV would give firms until 2027 to comply, with an output floor phase-in beginning at 50% in 2022.
The rules also outline a leverage ratio buffer for global systemically important banks, or G-SIBs, that must be met with Tier 1 capital set at 50% of a G-SIB's risk-weighted higher-loss absorbency requirements.
European banks, facing a capital shortfall of €39.7 billion compared to their December 2015 levels as a result of the finalized reforms, warned that the changes could make corporate financing and lending more difficult. But bankers in the U.S., where many of the world's largest banks reside, appeared to have a more measured response to the changes. Lobbying groups and others inside the industry directed their reactions toward the regulators, who will ultimately have the discretion to determine how Basel reforms are applied in the United States.
"It's important that U.S. regulators implement those standards and write the implementing regulations in a manner that's consistent with our country's interests and financial conditions," Wayne Abernathy, executive vice president of financial institutions policy and regulatory affairs at the American Bankers Association said.
But U.S. willingness to follow international agreements has been an unanswered question, especially with President Donald Trump who has pursued an "America first" policy since taking office. Republicans, convinced that international rules would curb the growth of U.S. firms, pressured the Federal Reserve to halt negotiations with international rulemaking bodies entirely. The resulting uncertainty over American cooperation threatened to stall out Basel IV negotiations, at times fueling worry that the finalized international standards would never come at all.
As Trump prepares to replace the last of the Obama-era financial regulators with his own appointees, it remains to be seen how eager the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency will be in implementing the finalized rules. But regulators have already shown an intention to perhaps abandon an unspoken policy of "gold plating" international regulations and to at least loosen standards on the smaller firms. The regulators, for example, most recently froze the phase-in of Basel capital rules while they considered regulatory relief for community banks.
Chris Cole, senior regulatory counsel for the Independent Community Bankers of America, said in an interview that in addition to regulatory interest in simplifying Basel for community banks, legislators are also trying to help companies avoid the international standards entirely. The U.S. Senate is working through a bipartisan bill that would allow banks with less than $10 billion in total assets to ignore Basel requirements if they have healthy leverage ratios.
"That's the more exciting thing for us, and that could make all this academic with regard to Basel," Cole said.
As for Basel IV, the Fed, FDIC and OCC jointly issued a statement supporting the Basel reforms but left the door open in terms of how they may be implemented.
"The agencies will consider how to appropriately apply these revisions to the Basel III reform package in the United States and any proposed changes based on this agreement will be made through the standard notice-and-comment rulemaking process," the agencies said.
Large American banks with a significant presence outside of the U.S. emphasized thorough global collaboration on implementing Basel IV. Stefan Gavell, global head of regulatory, industry and government affairs for State Street Corp., said the company agrees with efforts to realign capital requirements and "hope[s] the U.S. and other regulators will move quickly to adopt the revised rules into local regulations."
A spokesperson for JPMorgan Chase & Co. referred to a statement from the Institute of International Finance, a trade group which includes JPMorgan Chase and other globally exposed banks. IIF President and CEO Tim Adams expressed concern over the absence of the opportunity for industry review before the final package, but urged "international consistency" in its final implementation.
"We reiterate the importance of international regulatory standards and emphasize the importance of harmonized and coordinated implementation of Basel III standards across all jurisdictions," Adams said.
In a statement, U.S. Treasury Secretary Steven Mnuchin said the rules will "help level the playing field for U.S. firms and businesses operating internationally."
