The Consumer Bankers Association (CBA) issued a white paper this week that examines the impacts of federal banking regulators’ proposal to increase capital requirements on banks and financial institutions.
The paper, called The Impact of the Basel III Endgame Proposal on Consumers on the Margins of the U.S. Financial System, looks at how the proposal would impact retail banking and consumers and why it needs to be withdrawn or modified.
“When economists and policymakers talk about the Basel proposal’s average impact on the cost of credit, a lot can get lost in the averages,” CBA President and CEO Lindsey Johnson said. “Estimates about the average increase to the cost of credit hide important variance across commercial borrowers and retail borrowers. Within the retail sector, the averages may hide variance that is spread across a wide range of products, from credit cards to small business loans to mortgages,” Johnson added.
The proposal seeks to modify large bank capital requirements to better reflect underlying risks and increase the consistency of how banks measure their risks. According to the Federal Reserve, it would implement the final components of the Basel III agreement, also known as the Basel III endgame. Ultimately, the proposal is estimated to result in an aggregate 16 percent increase in common equity tier 1 capital requirements for affected banks, according to the Fed.
The CBA white paper said that the proposal includes a number of regulatory changes that would make it more expensive for banks to lend to retail consumers. And because it would only apply to banking organizations, non-bank lenders that are not subject to the same stringent capital standards would be at an advantage. That, in turn, increases the risk of consumer exposure to non-bank products that often have fewer consumer protections and less federal oversight.
Further, the paper said the impacts will be disproportionately felt by low-and moderate-income consumers, disabled consumers, and Black and Hispanic consumers. Thus, the disproportionate impacts could widen and harden important gaps in the financial system.
“But most importantly, focusing too much on averages runs the risk of losing sight of the important variance experienced by consumers on the margins of our financial system. When banks are forced to pull back on revolving credit card loans, high loan-to-value mortgage lending, or small business loans, particular consumer populations will feel the impacts first and worst. Given these risks, policymakers must slow down and give stakeholders enough information to understand how these enormous changes will impact these consumers,” Johnson said.
The paper was sent to the regulators – the Federal Reserve, the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency – with an introductory letter penned by Johnson.
“Ultimately, however, regulators should withdraw the Proposal to study its impacts on consumers, particularly those on the margins of our financial system. Regulators should then resubmit any modified version of the Proposal with that supporting data, so that all stakeholders can appropriately engage on the trade-offs that will ultimately be borne by the people that the Consumer Bankers Association’s members and regulators should be most focused on helping,” Johnson wrote.