Quaranta: Basel III would make credit more expensive
Michael J. Quaranta is president of the Delaware State Chamber of Commerce.
Last year, the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency put forth a proposal that could be an endgame to Main Street lending. The Basel III Endgame proposal is meant to strengthen the U.S. financial system and prevent bank failures from driving our nation into a financial crisis, but these rules go too far and threaten to slow growth in an already uncertain economic environment.
The proposal would significantly increase U.S. banks’ capital requirements and limit their ability to issue loans and credit cards to businesses and consumers. Many of these banks have a large presence in our state and employ many Delawareans. Any additional strain on these banks will certainly impact their employees.
The Delaware State Chamber of Commerce was proud to join more than 100 state and local chambers across America in raising concern about the proposal with President Joe Biden and his administration. It seems our calls for change have been heard. Earlier this month, the Federal Reserve’s top regulator, vice chair Michael Barr, outlined potential changes to the proposal.
The original proposal received unprecedented pushback. More than 97% of the 350 comment letters submitted raised concern about the proposal, and 86% of that opposition was from outside the banking sector. I commend vice chair Barr and the Fed for listening and responding to the overwhelming negative feedback on the proposal.
But, at this critical juncture, it is more important than ever to get the Basel III Endgame proposal right. The impact of it cannot be overstated. This proposal will touch every sector of the economy and Americans of all walks of life.
The proposal must have broad and material changes, not just tweaks around the edges. I am concerned that the capital increases outlined by Mr. Barr’s speech, while lower than the original proposal, will still present challenges for Delaware’s small businesses. When banks are forced to increase their capital reserves, they reduce their lending activity to individuals and businesses.
Delaware has a thriving small-business community, but its growth may be in jeopardy due to the Basel III Endgame. Under the previous proposal, loans to private companies are not eligible for more preferential risk weights, meaning a loan to a private company will be deemed riskier and cost more than the exact same loan to a publicly traded company. This could be devastating for Delaware businesses and their employees.
Approximately 99% of all U.S. companies are privately held and employ roughly half of all private-sector employees. One of the main reasons small businesses take on loans is to hire and retain workers. So, that could mean tightening pay and scaling back hiring new workers, since borrowing for that growth will be more expensive.
I hope the regulators will take this opportunity to make changes to the risk weights for private companies and other parts of the proposal. The Basel III Endgame does not exist in a vacuum, and increases in bank capital will reverberate through the economy, which is why it’s critical that the regulators get it right this time.
This moment of reevaluation by the regulators is a result of wide bipartisan pushback. As recently as July, Patrick McHenry, the House of Representatives’ Financial Services Committee chair, led a letter to the agencies questioning the necessity of the proposal. I hope these members of Congress and senators continue to call for much-needed changes to the proposal. Our economy is teetering on the verge of recession, and without the right changes, the Basel III Endgame could be the shove that pushes us over the edge.
The announcement of changes to the Basel III Endgame is encouraging news, but now is the time to recraft the proposal, so it can support the stability of our financial system without placing undue burden on our nation’s small businesses, the growth engine of our economy.
Reader reactions, pro or con, are welcomed at civiltalk@iniusa.org.
