ABA and BPI Letter to the Agencies on Basel III Implementation

Ladies and Gentlemen:

The Bank Policy Institute and the American Bankers Association appreciate the opportunity to comment on the joint notice of proposed rulemaking issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency that would amend the capital requirements applicable to large banks and those with significant trading activity.

I. Executive Summary

If adopted, the proposed rule would have a profound effect on the availability and cost of credit for nearly every American business and consumer, as well as on the resiliency of U.S. capital markets. The U.S. economy would suffer a significant, permanent reduction in GDP and employment; U.S. capital markets would become less liquid, and therefore more dependent on non-bank intermediation in normal times and on governmental support when those non-banks step away from financial markets during times of stress. The precise potential impact on capital market liquidity is extremely complex to assess but would likely be significant for several segments of the market, with resulting harm to U.S. businesses, consumers and Americans saving for their retirement. Moreover, given the stakes involved, the proposal is remarkable for its conclusory assertions and lack of analysis, including its failure to consider both its costs and benefits, not just to banks but to all corners of the U.S. economy.

At a macro level, the proposal contains no standard by which to determine what an appropriate risk weight should be for credit risk and operational risk, and therefore makes it impossible to determine whether a proposed risk weight is too high or too low or whether the costs of higher capital outweigh the benefits. The absence of a standard is significant on two levels. On the one hand, if the agencies articulated a standard with a specific and particularly high probability that capital would be able to absorb any losses experienced over the course of a year, commenters might acknowledge that the proposed risk weights were consistent with that standard but object to the standard itself on the grounds that its economic and market functioning costs were too high. On the other hand, if the agencies articulated a specific standard with a lower probability that capital would be able to absorb losses over the same period, then commenters might acknowledge that such a standard represented a reasonable balance of costs and benefits but cite data to show that the risk weights in the proposal are, in fact, inconsistent with that standard. The current proposal leaves the public unable to do either: we cannot assess the appropriateness of a standard that was never disclosed, and we cannot assess the calibration of individual risk weights against a non-existent standard.

At a micro level, in almost every case the proposed risk weight for a given asset is based on no data or historical experience and no economic analysis. In most cases, the proposal simply takes as given the risk weights negotiated by agency staff in Basel over many years, resulting in the capital mandates released in 2017 and 2019, which, in turn, are lacking in data or analysis, or at least any that has been made public. In other cases, the agencies purport to rely on data they have not disclosed or on unverifiable "supervisory experience." Also, in many cases, the agencies not only take Basel risk weights as a basis for the proposal but they then add arbitrary surcharges on top of the Basel weights, again with very little explanation. In all these cases, respondents are denied any meaningful opportunity to comment, as they do not know the standard used to develop the risk weights and the proposal generally provides them with no data or analysis on which to comment.

Because of the lack of supporting data and analysis for the policy choices in the proposal, we (and other members of the public) lack a meaningful opportunity to assess and comment on the methodology and the basis for many elements of the proposal.

Download the comment letter to read the full text.