Tuesday, April 23, 2013

In Letter to Fed, Senator Shelby Calls for More Transparency in Rulemaking Implementing Basel III Accord

Senator Richard Shelby (R-AL) has asked the Federal Reserve Board to provide the analysis used to determine that the proposed regulations implementing the Basel III Accord would leave the banking system adequately capitalized. In a letter to the Fed, he also asked the Board to provide a quantitative analysis of how the proposal will affect the capitalization levels of US banks by size and asset class. The Ranking Member of the Senate Banking Committee also requested that the Fed provide a cost-benefit analysis of the impact these rules would have on both the US banking system and the overall economy.

By omitting key data from this important rulemaking, he noted, the Fed is preventing public understanding of the impact of the rules and undermining the ability of Congress to hold federal agencies accountable for the regulations they promulgate. Senator Shelby emphasized that it is imperative that Congress and the public have the information they need to independently assess the proposed regulations before they are adopted.

While reaffirming his belief that strong capital requirements are essential to safety and soundness, Senator Shelby said that the proposal fails to explain how the Basel III Accord is appropriate for the US banking system and how the agencies calibrated Basel III for domestic financial institutions. Although he agrees with the Fed’s assertion that the financial crisis showed that the amount of high-quality capital held by banks globally was insufficient to absorb losses during the financial crisis, the Senator said that the proposed regulations do not explain why Basel III will ensure the adequate capitalization of the US banking system.

The Senator also strongly believes in transparent cost-benefit analysis in the federal rulemaking process to ensure full disclosure of the impact of new regulations. In that regard, the proposal implementing Basel III fails to explain with the requisite specificity the impact of the proposed regulations on the banking system and the overall economy. He asked the Fed to provide Congress with a cost-benefit analysis estimating how existing capitalization levels will change, the cost of complying with the rules and their aggregate impact on the economy.

While the banking agencies said that they conducted an impact analysis using bank regulatory input data, and made assumptions when such data was unavailable, noted the Senator, such assumptions and the underlying data were not disclosed. Essentially, the banking agencies have proposed regulations based in large part on a global quantitative impact study using non-public data and relying on non-public assumptions. More transparency is needed in this process, concluded the Senator, adding that such a cloistered approach to rulemaking is inconsistent with US democracy.