US regulators are facing significant challenges in finalizing bank capital hikes before the November presidential election. The Basel III Endgame rules aim to revamp how banks with assets over $100 billion manage their capital, potentially affecting lending and trading activities. Banks argue that the proposed extra capital is unnecessary and will harm the economy, leading to intense lobbying efforts to prevent the implementation of Basel III. The outcome of this regulatory battle is expected to be influenced by the election results, with Vice-President Kamala Harris supporting stricter bank regulations while Republican candidate Donald Trump is likely to roll back or weaken the rules if re-elected.
The ongoing disagreements among regulators have resulted in delays in finalizing the Basel draft, with uncertainty about whether the rules will be reissued and open for feedback from banks. Even if an agreement is reached soon, the feedback process would further prolong the timeline, making it difficult to implement the rules before the new administration takes over in January 2025. The completion of Basel III is crucial for two other major rules concerning debt and liquidity for big banks, which cannot be finalized until the Basel draft is in a good shape. These combined rules could require banks to hold over $200 billion in additional capital and debt, making any delays beneficial to the industry.
Progressives advocating for stricter regulations are concerned that the aggressive lobbying efforts by banks could undermine the comprehensive regulatory reforms they had hoped for under Democratic leadership. The failure to finalize Basel III could lead to a setback in achieving a more robust regulatory framework, despite last year’s bank failures exposing systemic risks. Regulators are facing pressure to re-propose the Basel rules to ensure proper procedure and reduce the risk of legal challenges from banks. However, disagreements among regulatory agencies, including the OCC, FDIC, and the Fed, could further delay the process.
Federal Reserve Chair, Jerome Powell, has emphasized the importance of getting Basel right, rather than rushing to finalize the rules. While some Fed officials support re-proposing the rule to address concerns and minimize legal risks, the OCC and FDIC are hesitant to move forward without the Fed’s agreement. The proposed rule requiring large regional banks to issue additional long-term debt to mitigate potential losses is also at risk of delay as it depends on the finalization of Basel III. Additionally, any political changes, such as the appointment of new regulatory heads, could further impact the regulatory agenda for banks.
Overall, the completion of Basel III and other related rules remains uncertain, with significant challenges in finalizing the regulations before the upcoming election. The outcome of the presidential election will likely influence the direction of bank regulations in the future, with stakeholders closely monitoring the developments. Despite the complexities and delays in the regulatory process, the focus remains on establishing a robust framework that ensures the stability and resilience of the financial system. The future regulatory landscape for banks will depend on the decisions made by the incoming administration and regulatory bodies, emphasizing the importance of effective collaboration and communication among all stakeholders.
