Basel III endgame: 5 things to watch in 2024

Bloomberg News

The Basel III endgame is entering its end stage.

Tuesday, Jan. 16 is the deadline for the public to comment on a joint proposal from the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency that would rewrite capital obligations for all banks with at least $100 billion of assets. 

Put forth in July, the proposal would force the affected banks to increase their aggregate Tier 1 equity capital by 16%, with the largest, global systemically important banks bearing the brunt of the increase, seeing their capital levels bumped by 19%.

Banks have pushed back hard against the potential rule change, as have congressional Republicans and other interest groups outside the banking space, including those representing small business, multinational corporations and the real estate sector. Their issues are multifaceted, but the primary arguments raised are that the rule goes too far and would force banks to pull back on lending. Some have also raised procedural concerns with the proposal.

Supporters of the reforms say the changes are necessary to close gaps in the current regulatory framework, which were laid bare during a run of bank failures earlier this year. By their estimate, the benefits of a safer banking system outweigh the potential costs — which regulators project would be minimal. Federal Reserve Vice Chair for Supervision Michael Barr said the average lending portfolio would see its required capital increase by 3 basis points, or 0.03%, while the bulk of the capital increase would be derived from trading and investment activities.

Regulators attached a litany of questions to the proposed rule change for the industry and the public at large to weigh in on. Once the comment period closes, the agencies will set to work absorbing those comments and absorbing them into a final rule. 

In a recent public appearance, Barr emphasized the importance of the comment period and noted that he and his fellow regulators are paying close attention to the feedback being given. 

“We have already heard concerns that the proposed risk-based capital treatment for mortgage lending, tax credit investments, trading activities, and activities that generate fee-based income might overestimate the risk of these activities,” Barr said. “We welcome all comments that provide the agencies with additional data and perspectives to help ensure the rules accurately reflect risk.”

The agencies are on track to put a final rule to a vote at some point in 2024, likely in the first half of the year. The proposal calls for implementation to start in 2025 with a three-year phase-in period. But there is much for policymakers to work through before reaching that point.

Below are the top storylines related to the Basel III endgame to track in the year ahead.