House Financial Services Subcommittee Scrutinizes Basel III "Endgame"; Witnesses Call for More Data and Time

Chairman Barr opened a House Financial Services subcommittee hearing by framing the session as an effort to address uncertainty in the Federal Reserve, FDIC and OCC's July 2023 Basel III "endgame" proposal and to press regulators on a flurry of related rulemakings.

The hearing focused on whether agencies have provided sufficient documentation and analysis for the original proposal and any partial reproposal previewed by Federal Reserve Vice Chair Michael Barr. Chairman Barr told the panel that "97% of the comments were negative," arguing that the proposal contained many elements unrelated to the March 2023 bank failures and alleging partisan and procedurally weak rulemaking.

Jonathan Gould, a partner at Jones Day, told the committee the agencies released the Endgame proposal without adequate supporting documentation, leaving stakeholders to "game out various scenarios and timelines." He said the lack of underlying data and transparent analysis made meaningful public comment and oversight difficult and warned that major regulatory initiatives taken without explicit congressional direction can be vulnerable to legal challenge.

Kenneth E. Benson Jr., president and CEO of SIFMA, cautioned that industry studies suggested large increases in capital requirements for certain trading activities. Benson said the industry's quantitative impact study estimated capital for large banks' trading activities could rise by about 129% in the original calibration, and cited a PricewaterhouseCoopers analysis that the initial Basel III endgame proposal could have cut U.S. economic growth by as much as 25% over a ten-year period.

Dr. Mark Jarsulik of the Center for American Progress argued that higher equity levels strengthen financial stability, citing FDIC data showing roughly $620,000,000,000 in unrealized securities losses on bank balance sheets in 2022 as an example of the risks regulators should consider. He also said the proposed aggregate 9% reduction (from an earlier 18% calibration) in capital increases for global systemically important banks (GSIBs) may still leave certain leverage measures too low to cover historic loss rates.

Members of the subcommittee questioned witnesses across multiple topics: the market-risk calibration and treatment of derivatives (which could raise hedging costs), the proposed treatment of tax-equity investments, possible effects on residential mortgages and small-business lending, brokered-deposit rule changes and the long-term debt proposal. Several lawmakers repeatedly urged delay of the long-term debt rule until Basel calibrations are finalized, citing interdependencies and potential cumulative costs.

Witnesses and members agreed on three consistent themes: regulators should publish the full reproposed rule text for public review; the quantitative impact study (QIS) underpinning calibrations should be released and used to inform comments; and related proposals (long-term debt, GSIB surcharge, brokered deposits) are interrelated and risk producing unintended economic consequences if finalized before Basel's outcomes are settled.

The hearing produced no committee votes or formal actions. Chairman Barr closed the hearing by inviting additional written questions and adjourning the subcommittee.

The subcommittee will likely monitor agency reproposals and expect to review the regulators' quantitative analyses before taking further oversight or legislative steps.