In any relay race, when the first leg stumbles out of the gate, every team member is hurt. Regulators recently placed a massive hurdle of increased capital requirements in front of banking institutions, hindering the ability to loan money, especially to struggling credit scores. The significant capital increases of Basel III Endgame are not an isolated action to the 29 banks with $100 billion in assets but will have costly consequences on the most vulnerable of our economy.
Justifying the July 2023 proposal with the recent failure of mismanaged banks, regulators advised significant increases to capital requirements. The business community fought this challenge last year, with over 97% of commentary opposed to the proposal. Now the economy is waiting to hear about the latest revisions and expecting the incoming Trump administration to prioritize the United States, instead of the recent bureaucratic attempts to tangle up the country’s financial institutions.
The Basel Committee on Banking Supervision issues global banking standards. Multiple iterations have been issued since the financial crisis of 2007 with the most recent version dubbed, “Basel III Endgame” which increases rules on credit, capital, and investment risk. The United States has been slow to adopt this rule, and other member countries have danced around the issue taking cues from the United States. But not to be outdone because of procrastination, U.S. regulators gold-plated the requirements proposed in July 2023.
The proposed increase in capital requirements will limit the ability of small businesses and low-income consumers to obtain financing. If you are a small business owner, the challenges in obtaining financing are diverse: credit history and longevity, risk, changing financial ratios, varying opinions within the same bank, inadequate funding, and the list goes on. To our economy’s detriment, farmers, small businesses, and low-income earners are going to have an even more difficult time obtaining financing due to the proposed Basel III Endgame rules.
The U.S. hurdle ignores the significant regulations the banking industry has adopted since the 2007 banking crisis, places the United States at a competitive disadvantage, and hurts the smallest economic players the most. The Basel III Endgame proposal failed to recognize the significant safety measures ingrained within the United States banking economy because, in April of 2024, all banks passed a stress test well above the mandatory floor.
The United States government has already implemented and fine-tuned domestic policy solutions to prevent a repeat of the 2007-2008 financial crisis. The Dodd-Frank Act is a major component of these preventions. In 2006, the median capital ratio was 12.5% and today it is approximately 18%. For the banking industry and most especially the loan-seekers, Basel III adds to our regulatory burden instead of complementing existing efforts. The proposed regulations would not have prevented any of the bank failures in March of 2023.
The only beneficiaries of the proposed Basel III Endgame requirements seem to be other global players who have lower requirements. On a $15 million loan in the U.S. banks would need at least $975,000 in capital to cover the loan if it is a publicly traded company or $1.5 million if it is not investment grade. In the E.U. more options exist for the loans, with capital requirements beginning at $300,000 up to $1.5 million.
A bank has a lot more flexibility to do business when fewer dollars are set aside to meet capital requirements. This summer, competing countries like the European Union realized the U.S. had yet to adopt these disadvantaging regulations and chose to postpone adoption for the E.U. for one year, to “ensure[s] a global level playing field and … to see what others are doing.”
In a discussion with a large banking institution, Mountain States Policy Center found that this bank would be forced to only fund mortgages from the wealthiest of clients with the highest credit scores of at least 760-780. Currently, this banking institution considers credit scores at 620 or above. Think of the implications to small businesses, farmers and ranchers, low-income households, and employment in regions reliant on agriculture and small businesses.
Basel III Endgame as proposed in the U.S. version will only hurt the economy and add unnecessary hurdles to already healthy banking institutions. As capital requirements increase because of new proposed calculations, borrowing will become more expensive, dividends will be complicated, and consumer lending will see reductions in credit cards, auto loans, and mortgage loans. This will be a surmountable hurdle for wealthier, high-credit-scoring members of our economy, but for most Americans, the new hurdles will be undefeatable.
Madi Clark is a Senior Policy Analyst for the Mountain States Policy Center, an independent research organization based in Idaho, Montana, Eastern Washington and Wyoming. Online at mountainstatespolicy.org.
