Big banks and their industry groups are intensively lobbying the Basel III Endgame. It is the federal proposal for stronger capital requirements. They claim it would impose punitive costs on banks. Also it harms all types of businesses, consumers and the economy of the United States. However all of these warnings are pointless with no any facts. The regulators should reject them. Recent reports show the proposal would increase equity capital requirements by $150 billion for eight U.S. megabanks designated as “global systemically important banks” (G-SIBs). This amount is just over one year of their average annual profits of $130 billion over the past three years.
The total eight biggest worldwide banks had $14.94 trillion in assets at the end of 2023 year. They funded 93% of this money in the form of loans, bonds and other debits. Their own money was only $1.06 trillion, that is called equity capital. Their combined Tier 1 leverage ratio, a measure of their financial health, was just 7.24%.
According to the above proposal they would need to increase this ratio. From 1% to about 8.2% meets the requirement. In June 2018 this ratio was higher. It was about 8.47%. But in the past six years, bank regulators let these banks lower their ratios by paying out big dividends and buying back lots of their own stock. So, Basel III wouldn’t even require these banks to go back to their 2018 level.
In June 2018, the biggest global banks (G-SIBs) had a strong Tier 1 leverage ratio of 8.47 percent. Over the past six years, federal bank regulators allowed these banks to lower their capital levels by paying out big dividends and buying back lots of their own stock. Now, even with new Basel III rules in place, these banks aren’t required to bring their capital ratios back up to the 2018 levels.
These megabanks have taken advantage of their status, named as “”too big to fail”. The combined Tier 1 leverage ratio of these banks had dropped to 7.24 percent.at the end of 2023. This ratio is less than the ratio required to bank with assets between $100 billion and $1 trillion (9.22 percent). Also the regional banks with assets between $10 billion and $100 billion (9.76 percent). And community banks with assets under $10 billion (10.52 percent).
It is important for regulators to make these big banks keep more of their own money in backup.
Furthermore, Stronger rules requiring banks to keep more of their own money on hand would protect the public from the huge costs of financial crises. When banks face a crisis such as during 2008, then it’s the responsibility of the government to spend trillions to bail them out. During the trouble and regional bank crisis the government spent billions to make the banks stable.
This increased government debt significantly, which could hurt the value of US Treasury bonds and the dollar in future crises.
To prevent such loss, it is necessary for banks to hold more of their own money as a buffer. And the best way for it is to do permanent investment by stocks. Permanent investment dont need to be repaid or pay interest.
In order to fulfill the requirement of Basel III Endgame,the Minneapolis Fed wants big banks to increase their own money in reserves by 15%. The allocated time period for it is more than 5 years. In this way the banks get safer.
Big banks don’t like Basel III Endgame because they want to use more borrowed money. Regulators should make banks use more of their own money. If they have more at stake, they would be more careful.
Big banks say stricter rules mean less money for businesses and people who need loans. But actually, banks gave more loans after the 2008 crisis.
Big banks claim that charges for the operational crisis from Basel III Endgame’s capital are too high. However these charges are not unfair. Big banks paid over $200 billion in fines from 2000 to 2023 for legal violations. Furthermore, these operational risks are the major source of losses in US banks. So it’s important for the United State banks to increase their equity capital to protect the public better. Regulators should adopt Basel III Endgame and higher equity capital requirements proposed by the Minneapolis Fed promptly.
