The Basel III Endgame Reforms Must Be Re-Proposed in Full

Since initially proposed by U.S. regulators a year ago, the criticism and concern around the so-called “Basel III Endgame” reforms has been loud, and from a diverse set of stakeholders. At a base level, there’s a question of the necessity of drastically raising capital levels at this time.

U.S. bank capital levels are already extraordinarily robust by historical standards and in terms of overall levels and quality of capital. These levels appropriately balance financial stability with economic growth potential. But further triggering alarm bells is the possible harm to the economy, such as higher prices and increased cost.

A new report released earlier this summer refines this concern. The study by PWC found that the U.S. Basel III Endgame, if implemented as proposed, would cause the U.S. economic growth to decline by up to 56 basis points or half a percent. This would equate to a reduction in growth by up to 25% based on the U.S. compound annual growth rate over the past 10 years.

The negative impacts would hit market participants across the spectrum, from retail customers to corporate borrowers. Policymakers themselves are now recognizing the need to go back to the drawing board, with the most prudent path being a full re-proposal of the reform package.

As they deliberate the next steps, regulators should consider: whether the U.S. banking system’s needs significantly more capital. If so, how much more is required and what are the relative costs and benefits to the broader economy, businesses and consumers? The stakes are too high to get this wrong.