Senate Legislation Would Require Impact Study on Regulations Implementing Basel III Accord

Bi-partisan Senate legislation would require the Federal Reserve Board, the FDIC and the OCC to conduct an empirical impact study on proposed regulations relating to the Basel III agreement on general risk-based capital requirements, particularly as they apply to community banks. The Basel III Commonsense Approach for Small Entities Act (Basel III CASE Act), S. 731, was introduced by Senators Joe Manchin (D-WV) and Dean Heller (R-NV). The bill has the support of the banking industry.

In a letter to Senators Manchin and Heller, the American Bankers Association noted that, although the new capital standards were originally intended to set appropriate levels of high quality bank capital for internationally active financial institutions, the regulations proposed by the federal banking agencies go far beyond the Basel III framework and would impact financial institutions of all sizes and business models and have adverse consequences for the communities they serve and the overall U.S. economy.

The proposals are complex and would have a multitude of unintended consequences. In fact, posited the ABA, notwithstanding the fundamental changes and the broad scope of the proposed rules, the federal banking agencies did not present a thorough quantitative analysis of the proposals. Although there were quantitative impact studies of the potential impact on the largest financial institutions, there was no empirical study of the impact of the proposals on all segments of the U.S. banking sector, customers, and the broader U.S. economy.

In the view of the ABA, S. 731 corrects this flaw by requiring the federal banking agencies to perform an empirical impact study of the proposed rules on the entire financial services sector before any final rules are issued, and this is specifically to include community, mid-size, and regional financial institutions. In addition, the study must be made public and subject to comment, and any new rules issued must be based upon the results of the study and comments.