Basel III Endgame may sound like the title of a spy thriller, but it represents the final phase of regulatory reforms implemented to ensure the banking system’s stability. While these regulations aim to fortify the U.S. banking sector by requiring the largest banks to reserve more capital, the banking industry perceives these measures as a threat to the economy, sparking a robust lobbying campaign against them.
Key Takeaways
- Basel III is an international regulatory accord designed to enhance the regulation, supervision, and risk management of the banking sector.
- Initially devised in 2009 by a consortium of central banks from 28 countries in response to the 2007–2008 financial crisis, Basel III aims to provide a dynamic framework adaptable to global economic and financial changes.
- The final phase, known as Basel III Endgame, began implementation in 2017 and is set to conclude in 2024, with regulations taking effect in mid-2025.
Understanding Basel III
Following the 2007–2009 financial crisis, global financial regulators sought to prevent a recurrence by establishing minimum capital, leverage, and liquidity requirements. By 2009, this led to the creation of the Basel III regulations through the Basel Committee on Banking Supervision. In the U.S., these rules were shaped by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). As of mid-2023, these regulations targeted approximately 37 U.S. banks holding over $100 billion in assets.
However, organizations like the Bank Policy Institute mounted strong opposition, warning that the proposed regulations would adversely affect small businesses and young families’ homeownership dreams. Despite the backlash, these regulations are critical for ensuring banking stability and the broader economic health.
Federal regulators have since faced pushback and made concessions, causing concern among proponents who accuse them of yielding to banking industry pressures. The final regulations are set for release before they take effect on July 1, 2025, marking substantial reforms expected to significantly impact banks and investors alike.
A Deeper Dive Into Basel III
Released by the Basel Committee on Banking Supervision post the financial crises of 2007–2008, Basel III reforms aim to restore and buttress international banking structures. Previous frameworks, Basel I and Basel II, introduced initial reforms yet proved inadequate in the face of newer financial upheavals. The transition to Basel III introduces enhanced regulations focusing on liquidity, leverage, and systemic risk.
Already taking shape worldwide, parts of Basel III include critical changes delayed mainly due to the COVID-19 pandemic. Basel III Endgame finalizes with significant emphasis on enhancing banks’ calculations for loan repayment risks, internal models for reserve capital, and operational risk management.
Minimum Capital Requirements Under Basel III
Basel III mandates more robust capital reserves to withstand financial losses, particularly for banks with assets exceeding $100 billion. The core segment of this capital is known as common equity Tier 1 (CET1), derived from stock issuance and retained profits. Big banks must maintain CET1 above 4.5%, with an additional buffer raising this to 7%, effectively offering a protective cushion.
Capital conservation and countercyclical capital buffers compel banks to maintain extra reserves, ensuring lending capabilities even during economic stress. Meanwhile, a G-SIB surcharge imposes further capital requirements on globally systemic important banks, addressing the subprime crisis legacy.
Leverage and Liquidity Measures
Higher leverage ratios and new liquidity requirements seek to balance lending activities against conceivable economic stress. The leverage ratio mandate requires Tier 1 capital proportionate to total assets (minimum 3%), guaranteeing banks aren’t overextended in lending. Liquidity measures are also streamlined to endure market relaxations, involving assets easily convertible to cash.
Intricately devised, the net stable funding ratio insists that available stable funding ratios apportion bank liabilities accurately alongside asset liquidity and risks.
Why This Matters For Everyday Investors
These stringent banking regulations bear implications beyond stockholders to touch the broader economy. More robust banks likely lead to confident markets and sustained economic growth despite potential short-term economic slowdowns from higher capital reserves impeding lending.
Financial stability directly bolsters available credit to businesses and individuals while mitigating market disruptions, ensuring investor portfolio preservation during economic fluctuations.
Impact on Big, Medium, and Small Banks’ Profits
Big banks worry Basel III Endgame could impinge on profits by diverting capital reserves from profit-yielding activities, potentially trimming stock valuations and dividends. Nevertheless, stable banks might attract more investors over time, endorsing their long-term profitability through fortified reserves.
Conclusion: Basel III and its Broader Economic Impacts
The 2007–2008 financial crisis spotlighted the fragility of banking institutions driven to reform through Basel III’s incremental yet transformative approach. As the 2028 enforcement looms, these amendments ensure vigilance against financial precarity while serving as a bedrock against unpredicted economic turbulence.
Related Terms: Basel Committee, Capital Buffers, Liquidity Coverage Ratio, Tier 1 Capital, Risk-Weighted Assets, Leverage Ratio.
References
- American Banker . "‘Unprecedented’: Banks’ Lobbying Blitz Against Capital Rules".
- Reuters. “US Bank Lobbyists Ranks Swell to Post-Crisis High Amid Regulatory Pushback”.
- Bank for International Settlements. “Basel Committee Membership”.
- Bank for International Settlements. “Basel III: International Regulatory Framework for Banks”.
- Bank for International Settlements. “Progress Report on Adoption of the Basel Regulatory Framework: October 2021”, Page 3.
- Board of Governors of the Federal Reserve. “Agencies Request Comment on Proposed Rules To Strengthen Capital Requirements for Large Bank”s.
- New York Times . “Why Big Banks (and Some Odd Allies) Oppose a Plan to Protect Banks”.
- U.S. Chamber of Commerce. “US Chamber Coalition Letter on Basel III Federal Reserve”.
- Reuters. “Powell Says ‘Broad’ Overhaul Coming for Basel Bank Capital Proposal.”
- U.S. Senate Committee on Banking, Housing, and Urban Affairs. “The Semiannual Monetary Policy Report to the Congress”.
- Bank for International Settlements. “History of the Basel Committee”.
- Federal Deposit Insurance Corporation. “Staff Report: Basel III.”
- Bank for International Settlements. “RBC - Risk-Based Capital Requirements”.
- Board of Governors of the Federal Reserve System. “Basel III Endgame Proposal”.
- Bank for International Settlements. “LEV - Leverage Ratio”.
- Bank for International Settlements. “Net Stable Funding Ratio (NSFR) - Executive Summary”.
- Congressional Research Service. “Bank Capital Requirements: Basel III Endgame”.
- Center for American Progress. “CAP Comments on Regulators’ Proposals To Increase Bank Capital Requirements”. (Dec. 14, 2023).
- Leonardo Gambacorta and Hyun Song Shin. “Why Bank Capital Matters For Monetary Policy”. BIS Working Papers 558 (2016).
- Bank for International Settlements. “BIS Member Central Banks”.
