In a recent blog post, the Securities Industry and Financial Markets Association (SIFMA) shows that increases in market risk capital requirements will lead to a decrease in the aggregate trading assets and liabilities for the largest US banks, with knock-on negative effects on the ability of corporations and other end-users to obtain affordable financing.
In addition, PwC’s survey of the literature on the cost of bank capital suggests that US global systemically important banks’ (GSIBs’) current capital levels are near their optimal levels, particularly when factoring in the risk-reducing effects of other prudential requirements. This further suggests that further significant increases in capital requirements, such as those envisioned under the Basel III Endgame, will result in material costs to the capital markets and the broader economy that will not be outweighed by any marginal financial stability benefits.
Regulators should therefore carefully weigh the costs and benefits of these capital reforms to ensure that they achieve an appropriate balance between financial stability and broader economic growth. In particular, SIFMA encourages regulators to consider the interactions between the Basel III Endgame reforms and existing elements of the US capital regime, and holistically evaluate whether other parts of the US capital framework ought to be amended in light of the Endgame reforms.