President-elect Trump seized on voter frustrations with the economy on his path back to the White House. The incoming administration has made clear they believe the election results afford them a mandate to govern, and with that the expectation of enhanced growth will be paramount. One of the key features of the economic puzzle the new administration will try to put together is banking, and specifically what opportunities are ahead of them to decide what to cut, what or how to regulate, and what to deregulate. In this case, the Basel III Endgame regulations should be top of their list.
Most Americans are likely unfamiliar with Basel III, which is part of what regulators are counting on. Basel III Endgame is the final set of rules by the multinational “Basel Committee on Banking Supervision” in Basel, Switzerland. The committee dates back to the 1980s and contains members from almost thirty jurisdictions globally. The final rules were voted on and approved by the members, including several U.S. financial regulatory bodies, among them the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) Board. The rules aim to stabilize and strengthen the global financial systems by imposing strict capital and liquidity requirements on financial institutions, as to provide a buffer against bankruptcy and financial collapse. While it may sound good on paper, one-size-fits-all regulations like this have unintended consequences.
America’s banking system thrives on innovation and the capacity to lend efficiently. The stringent capital requirements will force banks to hold more capital, in turn reducing lending capacity, making borrowing costlier, and increasing consolidation. Not only is this bad for the banking sector, small businesses and individuals are harmed when they either are forced to incur higher costs or seek out alternative financing methods. What’s more, this could negate the intended effect of the Basel III regulations by pushing consumers towards riskier financial behaviors. Of course, “opposite of what we meant to do” is a common theme of overburdensome regulation.
Leading us to ask: What were they thinking? Basel III is far and above anything U.S. banks have been subject to before, and it will come at a cost. America’s banking system thrives on innovation and the capacity to lend efficiently.
An almost obviously nefarious goal of the regulations is “a global level playing field” among different banks and countries across the globe. Why on earth would we want to level the playing field? Should our duty not be to have the best, most competitive banking industry in the world? We should be setting the standard on the world stage. The idea of leveling the playing field is just as laughable as it is harmful. There is no requirement, nor any indication, that Basel III regulations will be adopted uniformly nor simultaneously.
Apparently these concerns resonated with some U.S. regulators. Fed Vice Chair Michael Barr revealed in September that they are reevaluating some of the capital requirements, one of the top concerns among key stakeholders. This comes after policy analysts and industry players successfully mounted a wide-ranging campaign detailing the negative economic implications of Basel III.
Now enters the next Trump administration, with hints at a pressure campaign to deteriorate or abandon the rule. They undoubtedly feel they have a mandate to govern and the economy will be a top priority, as it is for every president.
Competitiveness, innovation, and economic strength are vital to American industry. Our regulations should be protective to the consumer, but consumer protection includes the capacity to be bold and take risks. Basel III is antithetical to the American spirit in this way with its overly cautious framework. The next administration should be wary of these regulations being imposed by an international body and reject Basel III as the arbiter of U.S. policy.
