Data suggests that the proposed Basel 3 Endgame would materially raise capital requirements for banks’ capital markets activities, warned the Securities Industry and Financial Markets Association (SIFMA).
Banks allocate equity capital to each business segment considering many factors including regulatory capital requirements for the business activities. Materially higher regulatory capital requirements for capital markets activities would result in certain businesses becoming less economically viable. Likely fewer capital markets products and services would be offered – diminishing market liquidity – and at higher costs.
Therefore, the Federal Reserve should pay particular attention to impacts on banks’ capital markets businesses when deliberating revisions to the proposal.
In a recent post, SIFMA made two other major points: that the regulatory capital requirements drive banks’ allocation of equity capital to each business segment, and how the Federal Reserve could take a set of actions to mitigate the Basel 3 Endgame proposal’s impacts on banks’ capital markets activities.
Large banks are instrumental intermediaries in the US capital markets which serve as the vital source of funding and financial risk management products and services for a wide array of public and private entities. Banks allocate equity capital to each business segment including capital markets businesses considering many factors including regulatory capital requirements for the business activities. And, each business segment is expected to meet the ROE target to be sustainable.
The Basel 3 Endgame proposal is expected to materially increase capital requirements for banks’ capital markets activities, particularly for trading and market-making, securitized assets, derivatives, and securities financing transactions (SFTs) among others. As a result, it would become more difficult for these business segments to meet their ROE targets which could mean higher costs for their clients/customers and may even endanger their economic viability.
Consequently, fewer capital markets products and services may be offered, and at higher costs, leading to diminished market liquidity. Therefore, the Federal Reserve should pay particular attention to impacts on banks’ capital markets activities when deliberating the set of revisions to the proposal.