Basel III Endgame Comment Period: Understanding the Proposed Framework

The Basel III Endgame Comment Period is here, and it's time to dive into the proposed framework. The Basel Committee on Banking Supervision (BCBS) has outlined a new set of rules to strengthen global banking regulations.

The BCBS aims to improve risk management and reduce the likelihood of bank failures. The proposed framework includes a new leverage ratio, known as the Net Stable Funding Ratio (NSFR), which will be implemented in 2022.

Banks will need to hold higher levels of high-quality liquid assets to meet the NSFR requirement. This will help ensure that they have sufficient funds to meet their short-term obligations.

The comment period is a crucial step in the process, allowing stakeholders to provide feedback and shape the final framework.

Additional reading: License for Banking

The Basel III Endgame proposal has been met with a significant amount of opposition from a diverse array of domestic and international interests.

Over 97% of comment letters received by the Banking Agencies either opposed the proposal or expressed substantial concerns with it, indicating a strong negative reaction from the public.

A significant majority of elected officials, both Democratic and Republican, joined comment letters expressing opposition to or serious concerns with the proposal.

The proposal's original deadline for public comments was November 30, 2023, but it was later extended to January 16, 2024, giving more time for comments to be submitted.

The Banking Agencies received a total of 356 comment letters that were made available to the public through January 24, 2024.

The proposal aims to overhaul the methods by which large banking organizations calculate risk-based capital requirements, with the goal of effectuating the Basel III Endgame international capital standard endorsed by the Basel Committee on Banking Supervision.

Here are some key points to summarize the comment record:

The proposed changes to the GSIB surcharge are aimed at making the system more accurate and fair. The Federal Reserve proposes to measure indicators on an average daily or monthly basis, rather than a single date.

This change will have a significant impact on foreign banking organizations currently subject to Category III or IV standards. They will be required to include derivatives in the cross-jurisdictional activity indicator.

The inclusion of derivatives will lead to some foreign banking organizations being subject to Category II standards, which will result in more stringent capital and liquidity requirements.

A different take: Basel Committee on Banking Supervision

The Basel III proposal has been met with significant opposition from a wide range of stakeholders. Over 97% of the 356 comment letters received by the Banking Agencies expressed strong concerns or outright opposition to the proposal.

The proposal was issued by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation on July 27, 2023. The original deadline for public comments was November 30, 2023, but it was extended to January 16, 2024.

A significant majority of elected officials, both Democratic and Republican, joined comment letters expressing opposition to or serious concerns with the proposal. This suggests that the proposal has broad bipartisan opposition.

If this caught your attention, see: I M B Bank Share Price Today

The U.S. Chamber of Commerce has also raised concerns about the proposal, specifically about the lack of transparency and data supporting the proposed rule. They argue that the agencies should have completed a quantitative impact study before issuing the proposal.

The Chamber's concerns are echoed by many other commenters, who argue that the proposal's lack of supporting data and analysis makes it difficult to provide meaningful comments. This highlights the importance of transparent and data-driven decision-making in rulemaking processes.

In fact, the Chamber had raised this point as early as May 2023, urging the Board to provide an opportunity for the public to examine its Holistic Capital Review before proposing a rule to implement new capital standards. Unfortunately, this advice was not taken.

Here is a breakdown of the commenters' reactions to the proposal:

The proposed changes to the GSIB surcharge aim to measure indicators on an average daily or monthly basis, rather than a single date.

This change could have significant implications for foreign banking organizations, particularly those subject to Category III or IV standards.

The proposed inclusion of derivatives in the cross-jurisdictional activity indicator could result in some foreign banking organizations being subject to Category II standards.

This, in turn, would lead to the application of more stringent capital and liquidity requirements.

The Federal Reserve observes that the proposed changes would have the most impact on foreign banking organizations currently subject to Category III or IV standards.

The comment period for the proposed changes to the GSIB Surcharge and FR Y-15 ends on November 30, 2023.

The proposed changes to the GSIB surcharge would also measure surcharges in 10-basis point increments, rather than the current 50-basis point increments, to reduce "cliff effects".

The inclusion of derivatives in the cross-jurisdictional activity indicator could have a major impact on foreign banking organizations, potentially changing their regulatory classification.

The proposed changes to the GSIB surcharge and FR Y-15 are likely to be contentious, given the dissent from multiple Federal Reserve governors and members of the FDIC Board.

Broaden your view: Which Banks Are Basel 4 Compliant

The Basel III endgame comment period is generating a lot of buzz, and for good reason. The Proposal is expected to affect banking organizations with assets of $100 billion or more, which is a significant change from previous suggestions that the new regime would only apply to the largest banking organizations.

The Proposal's impact will be felt by banking organizations that are already large or are planning to grow to a size where they can benefit from economies of scale. Setting the threshold at $100 billion in total assets will force these organizations to re-evaluate their balance sheet management strategies.

Banking organizations with assets of $100 billion or more will need to carefully consider whether to manage their balance sheet to stay below the threshold or grow to a size where they can benefit from economies of scale. This decision will be influenced by the increased regulatory burdens that the Proposal, if adopted, would entail.

The Proposal's scope of application is a key area of concern for stakeholders, and the Agency principals' previous suggestions that the new regime would only apply to the largest banking organizations have been upended.

The majority of commenters, over 97%, reacted negatively to the Basel III Endgame Proposal. This opposition comes from a diverse array of domestic and international interests.

A significant majority of elected officials, both Democratic and Republican, joined comment letters expressing opposition to or serious concerns with the Proposal. This shows that the Proposal has sparked a broad range of concerns across different political parties and industries.

The Banking Agencies received a total of 356 comment letters, which provides a significant amount of feedback on the Proposal. This feedback is crucial in shaping the final version of the Proposal.

Most of the comment letters either opposed the Proposal or expressed substantial concerns with its critical aspects. This suggests that the Proposal needs to be re-examined and revised to address the concerns of the commenters.

Here's a breakdown of the types of commenters who opposed the Proposal: