WORD ON THE STREET: The primary goal of Basel III is to strengthen bank capital requirements. This is a worthy goal, as strong capital requirements are essential for a safe and sound banking system and to protect against taxpayer-funded bailouts. Unfortunately, one of the clear lessons of the financial crisis is that bank regulators set capital requirements too low.
In their proposals, the federal regulatory agencies themselves admit that when the crisis came, ‘the amount of high-quality capital held by banks globally was insufficient to absorb losses.’ As a result, taxpayers were called upon to bail out our banks, and our economy suffered its worst crisis since the Great Depression.
In light of this recent history, I support the agencies' goal of enhancing capital levels to protect American taxpayers from having to bail out banks down the road. Yet, given the failure of bank regulators to set appropriate capital levels before the crisis, I cannot help but doubt the regulators' ability to set them correctly after the crisis.
Accordingly, I believe the Senate Banking Committee must rigorously review the agencies' proposals to ensure that the goal of Basel III is actually achieved. We should not simply rely on the agencies' assurances that their proposed rules will leave our banks properly capitalized.
Instead, the agencies must demonstrate to this committee and the public that their proposed rules are supported by proper data and rigorous economic analysis. Regrettably, the agencies have so far not provided sufficient data and analysis of their proposals.
That's why, weeks ago, I wrote to the agencies, asking them to publicly release detailed estimates on how capital levels will change for U.S banks under Basel III, how the agencies determined that those levels will leave the U.S. banking system well-capitalized and what will be the compliance costs. These are basic questions that should be publicly answered before this rulemaking proceeds.
Unfortunately, the agencies' response relies largely on studies by the Basel Committee, which use data only from the very largest banks. For example, one key study included data from only 13 U.S. banks.
In addition, the Basel Committee's quantitative impact study aggregates country results. It does not specifically show how Basel III will impact the U.S. Even more troubling, the agencies state that they believe Basel III is appropriate based on the losses experienced by U.S. banks, but they do not provide data to support this conclusion.
It is time that our banking regulators stop outsourcing their economic analysis to the Basel Committee and start doing their own work. They need to determine how Basel III will impact our diverse and unique banking system and the overall U.S. economy. They also need to end their cloistered approach to rulemaking.
First, the public has the right to know the consequences of adopting Basel III, including how it will likely impact the stability of the U.S. banking system, economic growth in the U.S. and the ability of American consumers to obtain loans. The public's right to know is even more pronounced given the agencies' failure to properly set capital requirements before the crisis.
Moreover, there are growing doubts about Basel III's model-based approach to setting capital requirements. Many commentators, and even some regulators, are concerned that the Basel III models are too complex and inaccurate to be relied upon. If the agencies want the public to have confidence in Basel III, they need to make their case publicly.Â Â
Finally, by omitting key data and analysis from this important rulemaking, the agencies also are undermining the ability of Congress to hold the agencies accountable. The public depends on Congress to conduct oversight and to ensure that the agencies do their jobs effectively.
Without more information, however, it is impossible to determine if the proposed rules will actually set capital requirements at the appropriate levels. Congress cannot effectively engage in oversight if we do not know what goes on behind closed doors at the agencies. Both Congress and the public deserve a far better explanation than they have so far been given.
Sen. Richard Shelby, R-Ala., is the ranking Republican on the Senate Committee on Banking, Housing and Urban Affairs. This article is adapted and edited from remarks delivered during a Nov. 14 committee hearing. The original text of the senator's remarks is online.