Biden's banking rules will fuel inflation, lawmakers say

By Chris Matthews

Banking industry says Basel III endgame will raise prices for utilities, groceries and housing

The banking industry has pulled out all the stops in its fight against new regulations that it argues will raise consumer prices for utilities, groceries and housing - and its campaign is convincing powerful lawmakers on both sides of the aisle.

The emerging opposition to the rules puts into question a central goal for Biden administration prudential regulators: to set capital rules that will help avoid the need for bank bailouts in the event of a future financial crisis.

Republicans in Congress are united in their opposition to the new rules, and many Democrats on the powerful House Financial Services Committee are also calling for major changes.

Rep. Brad Sherman, a California Democrat, expressed his displeasure in a hearing Wednesday that featured the heads of the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve's Vice Chair for Supervision - arguing that the rules will put U.S. banks, businesses and consumers at a disadvantage relative to those in Europe.

"This overall approach is being is being sold as if it's conforming with an international standard, but actually we're going to have much higher standards than Europe," Sherman said. "That means less lending."

Another California Democrat, Rep. Juan Vargas, said that the rules will "make it more difficult for people who are first-time home buyers to qualify for a mortgage."

In recent months, the banking industry KBWB has sent a post-financial-crisis record number of lobbyists to Washington to protest a set of rules known as "Basel III endgame," which will force banks to fund themselves with a greater proportion of bank shareholders' money, relative to various forms of debt.

The idea behind these measures is that in the event of a crisis, banks can rely on this capital cushion to cover losses and still pay back customer deposits or other forms of debt that make up the bulk of bank funding.

This sort of funding is more expensive for banks, however, and will force them to accept lower profits or raise prices for a variety of services.

It's not just the banking industry that is fighting the new rules. Leaders of utilities and agriculture advocacy groups have argued in comment letters that the new rules would make it more expensive for businesses to use derivatives to insure against unforeseen increases in production costs.

"These regulations ... will unfortunately burden consumers with higher utility bills due to costs of upstream regulatory compliance obligations, instead of helping," wrote Robert Poehling, executive director of the National Public Gas Agency, in a January letter to the Fed.

Advocates for stricter capital standards argue that critics are overstating the case that these rules will raise prices, as opposed to simply reducing bank profits.

Fed Vice Chairman for Supervision Michael Barr estimated last July that banks either already have enough capital to meet these new requirements or would be able to raise the funds simply through retained earnings over a two-year period, even while maintaining dividend payments to shareholders.

"The four largest banks over the last 10 years paid out $630 billion to shareholders in dividends and buybacks," said Shayna Olesiuk, director of banking policy at the financial-reform advocacy group Better Markets. "That's a choice they are making, and it will be their choice whether to pass along costs to their borrowers."

Olesiuk also noted that any resulting price increases would pale in comparison to the costs borne by the average American by another financial crisis.

On Wednesday, Barr said that he expects there to be "broad, material changes" to the rule proposal in response to comments. Advocates for tougher capital rules worry that this will result in the need to repropose the rule altogether.

A reproposal would require another comment period and time for regulators to incorporate those into a final proposal, which would likely push implementation into 2025 - when presumptive Republican presidential nominee Donald Trump could be in the White House.

Trump was a regulation skeptic during his first term as president, and analysts believe that a second term would be a boon for the financial-services industry.

"While it could be released this year, we think the rule won't be finalized until 2025," wrote Ian Katz, a financial-industry analyst at Capital Alpha Partners, in a recent note to clients. "That raises questions about what happens to Basel ... if Donald Trump wins the presidential election."

-Chris Matthews

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05-15-24 1532ET

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