From left, Daniel Pinto, Colm Kelleher and David Solomon
From left, Daniel Pinto, Colm Kelleher and David Solomon © FT montage/Em Fitzgerald/Dreamstime

Global bank executives have rounded on US regulators’ plans for new industry capital rules, warning that the Basel III endgame proposals are “fighting yesterday’s war” while putting financial market liquidity at risk.

In interviews at the Financial Times Global Banking Summit this week, top US executives argued the current proposals would force lenders to cut back on credit and products, while their European counterparts echoed calls for a rethink despite standing to benefit from the EU’s less onerous interpretation of the standards. 

The “US Basel III proposals are actually fighting yesterday’s war”, UBS chair Colm Kelleher told the FT.

“I think it’s clear that [regulators] did not follow due process in the quantitative impact study and feasibility studies and so on,” said Kelleher, who was previously an executive at Morgan Stanley before presiding over UBS’s rescue of rival Credit Suisse in March this year.

The proposals will increase the amount of capital that the largest and most complex banks have to hold relative to their assets, potentially requiring them to put aside tens of billions of dollars.

“Is this about more capital or not? I don’t think what has happened [at Credit Suisse was] about [needing] more capital,” he added.

US proposals for implementing the final round of international banking standards, dubbed the Basel III endgame reforms, have provoked fierce opposition from Wall Street since they were put forward in July.

US regulators have pointed to the failure this year of midsized lenders Silicon Valley Bank, Signature Bank and First Republic — three of the largest bank failures in US history — as proof that a review of bank capital requirements is timely. 

But HSBC chief executive Noel Quinn argued at the FT summit that there was “a bit of a disconnect in that argument because actually what happened earlier this year wasn’t about capital, it was about liquidity management”.  

Senior bankers at Goldman Sachs and JPMorgan Chase cautioned that the US Basel III endgame proposals risked draining the financial markets of liquidity and would drive up costs for borrowers.

Higher capital requirements for banks did not “materially [change] safety and soundness in a way that matters compared to the friction of the cost”, Goldman chief executive David Solomon told the FT.

Consumers could ultimately feel knock-on effects through higher airfares as it became more expensive to hedge fuel prices, Solomon suggested, while constraints on pension funds lending out their securities could hurt returns for investors.

The reforms could also have a significant effect on liquidity, said JPMorgan president Daniel Pinto. “The top five market players in the world are American banks. If we all have to recalibrate, the impact on liquidity in the system will be huge.” 

The US has lagged behind most jurisdictions in implementing the Basel III reforms, with an unusually public campaign lobbying against the latest proposals.

US watchdogs have said capital requirements for global systemically important banks (G-Sibs) would rise by an average of 19 per cent under the proposals. But one industry lobby group estimated that the increase would be as much as 24 per cent, pushing up the cost of borrowing. 

The Basel Endgame proposals are likely to be a key topic at Congressional hearings in Washington next week, where the chief executives of the largest US banks are due to speak. 

Executives expressed optimism at the FT summit that regulators would pare back certain aspects of the rules. Solomon said he did not expect Basel Endgame proposals to ultimately be implemented “exactly the way they’re put forward”. Pinto said: “It’s very unlikely that the outcome will be exactly as expressed in this round”.

Michael Barr, the Federal Reserve’s vice-chair for supervision, has already hinted that the US central bank may be prepared to make adjustments following a comment period that is due to run until mid-January. Both Democratic and Republican lawmakers have expressed concerns about the impact of the proposals on households and businesses.

“We’re quite open to comment, and we want to improve the rule before we get to a final rule,” said Barr. “We do care very much about access to credit for low and moderate income borrowers. We hear those concerns and we will very much take those into account”.

Deutsche Bank chief executive Christian Sewing said the prospect of tougher capital rules for US banks could level the competitive playing field with their more dominant US rivals, however.

“I think in Europe . . . we are kind of done with Basel III,” Sewing said. “I am sure also that there will be some impact on the capital on the US banks and if I compare that overall with what is happening with Europe, I think we are now coming more to a level playing field.”

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