Regulators will take comments on Basel III endgame impact analysis

Bloomberg News

Federal regulators will give the public a chance to weigh in on the projected economic impacts of their proposed capital reforms for large banks.

During a public appearance on Tuesday afternoon, Federal Reserve Vice Chair for Supervision Michael Barr said the central bank's findings will be used to shape the final version of the so-called Basel III endgame proposal, which is expected to be released later this year.

"We'll analyze that information, and, on an aggregated basis, we'll publish that information. We'll give people a chance to comment, in effect, on the impact itself," Barr said during an event hosted by the professional group Women in Housing and Finance. "That is an important part of the input that we get as part of the proposed rulemaking process, an important part of getting public input and public comment. So, it will feed into how we develop the final proposal."

Prior to Barr's remarks, Fed officials had not disclosed that the impact data would be made open to public comment.

The Fed invited banks to submit data about how they would be affected by the proposed capital framework — which introduces new risk weights for all banks with at least $100 billion of assets — in October. The Fed's announcement said it would make summaries of its findings available to the public, but did not mention seeking commentary on those findings. 

Along with the data collection effort, the central bank also announced that it would extend the comment period on the Basel III endgame proposal by six weeks. The comment period and the data submission window both close next Tuesday, Jan. 16.

The economic impact analysis of the capital changes — or lack thereof — has been an ongoing concern among banks and their allies since the proposal was put forth over the summer. 

In September, several banking trade associations sent a letter to regulators asking them to better detail the research findings that underpinned the changes than re-propose the rule. The groups accused the Fed, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency of shirking their obligations under the Administrative Procedure Act, setting the stage for a potential legal challenge down the road.

Barr made mention of additional data collection during the Federal Reserve Board's public meeting on July 27, during which it proposed the rule change. He said the additional data would be used to "refine our estimates of the rule's effects." It is unclear whether the central bank always intended to seek public input on its findings, or if the move is a response to the feedback it has received in recent months. A Fed spokesperson declined to comment Wednesday afternoon.

Todd Phillips, a law professor at Georgia State University and former FDIC lawyer, said holding a public data collection and soliciting public commentary on it is a departure for rulemaking norms. He said the move could be an effort to get ahead of potential legal arguments. 

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"This has the [Fed's] general counsel's name written all over it," Phillips said. The Federal Reserve Board's General Counsel is Mark Van Der Weide. "What seems to have happened is they intended for this data collection to be a part of the rulemaking process and somehow it got outside of the rulemaking process, and now they are trying to dot all the i's and cross all the t's to make sure everything is legally appropriate."

During Tuesday's event, Barr noted that the Fed conducted a quantitative impact study of the banking sector "a few years ago," that informed its proposal last year. He said the second study would supplement that data and provide a more accurate picture of how banks would be impacted by the changes under consideration.

"What we decided to do is, in addition to that information that has already been collected, is to do a second quantitative impact study as part of this proposal, to make sure, first of all, that we had up-to-date information from the banks, based on their current balance sheet," Barr said. "And second, that they had the precision of the exact proposal so that they could figure out how it worked through in their own balance sheets and be able to tell us with greater precision how that would work."

He noted that the Fed would not release the full results of the impact findings, but rather its own analysis of those findings.

Throughout his comments on Tuesday — as he has done at various points since the proposal was made — Barr emphasized the importance of having a robust pool of comments to draw on when finalizing a rule. 

"I can't, because we're in the middle of the comment period, say where we're going to land in the final rule, but I can say that the comments have already been really, really helpful to us," he said. "We've learned a lot from the comments and I think that'll help us make a better final rule."

Banks and their trade groups are not the only ones who have raised issues with the capital proposal or the Fed's approach to it. Fed Gov. Michelle Bowman has on numerous occasions expressed concerns about the impact of the rule and its appropriateness. She has also emphasized the need for the final rule to be "informed by data, analysis, and genuine debate and discussion among policymakers."

In a wide ranging speech on regulatory and supervisory developments delivered at the South Carolina Bankers Association 2024 Community Bankers Conference, Bowman called for banks to share their concerns with regulators before the comment period closes. She also urged her fellow regulators to be open to changes based on new information.

"My sincere hope for 2024 is that policymakers have the humility to acknowledge the intended and unintended consequences of these and upcoming regulatory reform efforts, and the courage to change course, when necessary, to mitigate and minimize these consequences," she said. "The future of the banking system and the ongoing strength of the U.S. economy depend on it."