Wednesday, November 14, 2012

Senator Shelby Questions Cost-Benefit Analysis of Basel III Implementation at Banking Committee Hearing

Senator Richard Shelby (R-AL) questioned how the  Basel III capital accord will impact US financial institutions and the unique and diverse US banking system at a Banking Committee hearing on Basel III. In a statement at the hearing, Senator Shelby, the Committee’s Ranking Member, said the public has the right to know the consequences of adopting Basel III, including how it will impact the stability of the U.S. banking system, US economic growth, and the ability of consumers to obtain loans. The public’s right to know is even more pronounced, he said, given the 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, said the Senator, they need to make their case publicly.  

Senator Shelby called on the Banking Committee to conduct a rigorous review of the banking agencies’ proposals to ensure that the goal of Basel III is actually achieved. The Committee cannot simply rely on agency assurances that their proposed rules will leave US banks properly capitalized. Instead, banking regulators must demonstrate to the Committee  that their proposed rules are supported by proper data and rigorous economic analysis. Regrettably, he said,  the agencies have so far not provided sufficient data and analysis of their proposals.

In October, Senator Shelby sent a letter to the banking agencies asking them to publicly release detailed estimates on how capital levels will change for US financial institutions under Basel III, how the agencies determined that those levels will leave the US banking system well-capitalized, and what will be the compliance costs. These are basic questions that should be publicly answered before this rulemaking proceeds, he said.

But, the response of the banking agencies to the Shelby letter relied largely on studies by the Basel Committee, which used 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, noted the Ranking Member, and does not specifically show how Basel III will impact the U.S.  Even more troubling to the Senator was the agencies’ belief that Basel III is appropriate based on the losses experienced by US financial institutions, but they do not provide data to support this conclusion.

Senator Shelby admonished the banking regulators to stop outsourcing their economic analysis to the Basel Committee and determine how Basel III will impact the diverse and unique US banking system and the overall economy.