Senate Banking Committee Chairman Tim Scott (R-S.C.) led a group of senators in a letter to Federal Reserve officials to encourage them to finalize a Basel III Endgame rulemaking.
Pointedly the letter urged the board to take an integrated approach to analyzing bank capital requirements. Addressed to Federal Reserve Chairman Jerome Powell and vice chair of supervision Michelle Bowman, the letter urged the board to reassess the weighting of the p-factor in the context of securitizations, to keep it at or below the status quo level of 0.5.
A p-factor determines the capital requirements of securitized loans, compared with loans that banks hold on their balance sheets.
"A recent previous proposal called for doubling the p-factor to 1.0 without economic justification or analysis," according to a statement from the Structured Finance Association, which applauded the lawmakers' outreach.
Senators strongly objected to the move in the letter, saying setting the p-factor to 1.0 would erroneously treat securitized high-quality assets as if they carried similar risks as less-stable asset pools.
The eight lawmakers who signed the letter, including Sen. Thom Tillis (R-N.C.)
"The Board should endeavor to make sure that any proposal uses the baseline that existed before the post-pandemic capital ramp-up," instead of today's capital levels, according to the letter, released on Wednesday.
Specifically, since 2020 common equity tier 1 ratios for large U.S. banks have increase by more than 20%, the senators wrote, suggesting that would not be a suitable standard. Instead, it would institutionalize excessive requirements for banks and ultimately tighten capital access for consumers and small businesses.
