Federal regulators are getting ready to implement new rules for banks. The result could be less credit and slower growth for American business.
America’s banking sector is an integral part of the nation’s economy. Companies of all shapes and sizes, across diverse communities, rely on the financing banks provide to start, run, and grow their businesses. However, federal banking regulators in Washington, D.C. may soon increase bank capital requirements that could harm businesses and by extension the American economy.
These policy changes, known as “final Basel III” or “Basel III endgame,“ were developed in 2017 by the Basel Committee on Banking Supervision (BCBS) — a standard setting body made up of bank regulators from around the globe. These standards could do significant harm to main street businesses and the U.S. economy if banking regulators fail to make some major changes when implementing the capital requirement.
Understanding capital requirements
America’s banks are overseen by an alphabet soup of federal regulators each with distinct but interrelated responsibilities, including setting rules requiring banks to hold a certain amount of capital as a means of protecting against losses on loans and investments. Here, “capital” primarily means shareholder equity and financial assets that fund lending and can be used to absorb losses. This capital serves as a buffer to help prevent banks from failing but comes with significant costs to banks, and by extension to their customers.
How businesses bear the cost
When capital requirements for banks are increased, they are forced to choose between offering less financing to customers or offering it a higher cost. As a whole, increasing capital requirements makes it more expensive for banks to provide financing to corporations, main street business, and consumers.
Research from the Basel Committee on Banking Supervision – the body that devised the new capital standards – has shown that more stringent bank regulations make bank credit more expensive for borrowers. In addition, for every percentage point increase in capital requirements, there is an associated increase of up to 13 basis points in loan spreads. Last month, the Wall Street Journal reported that large banks may be required to increase their capital by more than 20 percent.