On September 18, 2023, the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly published and sought comments on a proposal to implement new, standardized capital requirements that would, among other things, increase capital requirements for banks with $100 billion or more in total assets. Known colloquially as “the Basel III Endgame,” the proposal seeks to implement standardized capital requirements related to operational risk that would replace the internal risk model approach banks currently utilize with sets of metrics (such as bank revenue and past losses) to determine capital cushions. Capital ratios for covered banks would also now include unrealized gains and losses from certain securities. The proposal would also change how covered banks assess credit risk for capital purposes by replacing internal models with asset-specific risk weights. Supplementary leverage ratios and countercyclical capital buffers would also apply to covered banks if such requirements are triggered.

While the three federal banking agencies cite the need to increase the strength and resilience of the banking system, banking and non-banking trade groups have pointed to the significant negative impacts on U.S. consumers if the proposal is enacted largely as proposed. In its White Paper published on January 14, 2024, the Consumer Bankers Association (CBA) noted the potential for “lifelong negative impacts” to consumer financial health with low- and moderate-income (LMI) consumers, disabled consumers, and Black and Hispanic consumers bearing the brunt of the impact. With excessive capital mandates that apply only to banking organizations comes the inevitable trickledown effect of passing along the increasing cost of loans and other financial products on to the consumer. Faced with these increasing costs, consumers may be more likely to turn to non-bank (and oftentimes less regulated) lenders and products for their credit needs, which in turn could lead to more predatory lending practices and difficulty building credit for consumers that comprise LMI and minority populations.

The CBA also raised concerns over the lack of information provided by the regulatory agencies regarding the impact the changes would have on consumers given the magnitude of the proposed changes. In its cover letter to the regulators, the CBA provides a list of proposed changes to the Basel III endgame proposal that could help balance the interests of safety and soundness within the banking system on the one hand and the freedom to for banks to operate and maintain their lending to LMI consumers on the other hand. Among the CBA’s suggested changes are a recalibration of the proposal approach to operational risk capital, eliminating the operational risk component from the Federal Reserve Board’s stress test, retaining the 25% deferred tax asset deduction threshold for large banks, fundamentally changing the retail risk weights in the proposal to reflect actual risk, separate risk weights for small and medium-sized enterprises, and retaining the 100% risk weight category for non-significant equity exposures. While the CBA notes these changes along with the other proposed revisions they highlight in their cover letter would improve the proposal, the CBA ultimately calls for the proposal to be withdrawn and resubmitted, with modifications, once the regulators have completed a study of the impacts on consumers.

Non-banking trade groups have echoed some of the same sentiments and concerns as those outlined in the CBA’s White Paper. Several affordable housing, civil rights, and urban advocacy groups, including the National Housing Conference, NAACP, and the National Urban League, issued a joint letter to the federal agencies noting potential for a “devastating impact” on efforts to increase homeownership in communities of color. Calling the proposed new capital requirements “overly aggressive,” the National Community Reinvestment Coalition, which has historically favored stronger lending regulations, suggested in its letter to the federal agencies that they adopt the effective but less punitive risk weightings under Basel III. Black Leaders Organizing for Communities, an advocacy and campaigning organization, also voiced concerns over the effects of the proposal and urged regulators not to adopt requirements that could negatively impact mortgage credit for historically underserved populations and communities. Business groups like the Business Roundtable expressed concerns regarding the proposal’s potential to reduce innovation and economic growth.

In summary, banking and non-banking groups alike have made no secret of their concern over and criticism of the Basel III Endgame Proposal. If enacted as proposed, regulators estimate covered banks could see an average increase in their capital requirements of 16%, although other projections have noted the country’s biggest banks could see increases of 25% or more. With excessive capital mandates placing exclusive and increasingly tighter restrictions on bank growth, consumers may turn to non-banking providers and products, which may have long-lasting and permanent effects on U.S. consumer financial health.