The Bank of England in Threadneedle Street, London. by Adrian Pingstone is licensed under Public Domain.

On January 9, 2023, American Banker’s BankThink platform published an op-ed by Federal Affairs Manager Bryan Bashur. The op-ed discusses how the capital standards adopted by the Basel Committee on Banking Supervision have wrongly taken precedence over the authority invested in Congress to legislate and determine the appropriate capital requirements for American banks. 

The piece begins by noting that the voluntary consortium of international banking regulators dictates domestic banks’ capital requirements even though it possesses no supranational authority or legal force. It goes on to state that: 

Congress should be the sole entity authorized to direct how American banking regulators promulgate rules that minimize leverage, enhance capital loss absorption and ensure a vibrant allocation of capital to individuals and businesses. 

Next, the article explains that the Basel Committee possesses no legal authority in the United States, as it is simply a committee of international banking regulators who have expressly stated their mission is not to promulgate legally binding decisions. Its mission is instead to set global standards for the “prudential regulation of banks.”  

The op-ed continues by showing that, despite this lack of authority, federal banking regulators have prioritized the Basel Committee’s recent set of standards, Basel III, over congressional directives: 

The regulators’ proposed rulemakings from 2012 primarily implemented ‘certain aspects’ of Basel III and ‘other revisions’ based on a ‘series of documents between 2009 and 2011’ by the Basel committee. Attempting to portray a semblance of congressional approval, the rule goes on to say it ‘would also address relevant provisions’ of the Dodd-Frank Act. Clearly the primary focus of the rule was to incorporate the Basel framework. Legislation passed by Congress was an ancillary consideration.

The piece also notes how Michael Barr, the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, refuses to loosen capital requirements. In a speech at the American Enterprise Institute last month, Barr dismissed any consideration of lowering capital requirements because it augurs a “race to the bottom.” 

Barr neglects to discuss any costs associated with higher capital requirements. One study shows that “for every 1% increase in capital minimums, lending rates will rise by 5 to 15 basis points and economic output will fall 0.15% to 0.6%.” In the long run, higher capital requirements may also “reduce competition by acting as an entry barrier for new banks.” 

The article shows that Barr has admitted to implementing Basel III at the expense of congressional consideration of proper prudential regulations and explains how Barr fails to show any inclination to give Congress its deserved say over banking regulation.  

Finally, the op-ed explains that the implications of the Basel III standards are huge for the national and global economy, and states that explicit direction from Congress is necessary to help “preserve the separation of powers” and to serve “as a vital check on expansive and aggressive assertions of executive authority.” It concludes by arguing that Congress should take a far more active role in implementing banking capital requirements to avoid permitting the Basel Committee to have de facto rule over the American banking sector.  

Click here to read the full op-ed.