As if the “fiscal cliff” and the prospect of looming tax hikes
were not enough, banks of all sizes — and in turn consumers and
businesses who rely on their credit — also face the “Basel
cliff.”
The term doesn’t refer to a mountain in Switzerland, the
beautiful country which surrounds the city of Basel. Rather, it
refers to meetings in Basel and elsewhere by international banking
bureaucrats to develop the Basel III agreement for harmonizing
international capital requirements. If implemented as planned, it
will dramatically increase the cost of mortgages and small business
loans while, according to many experts, actually making the banking
system less stable.
The Basel Cliff is part of what Sen. Rob Portman (R-Ohio) and
others have
called the “regulatory cliff.” In the year leading up to the
election, the Obama administration put hundreds of regulations on
hold.
As I
wrote in Forbes a couple weeks before the election,
these regulatory delays “may have given employers just enough
breathing room,” spurring some slightly improved growth measures in
2012. And this slight retreat from stagnation may have been just
enough to carry President Obama to his election victory. But
now that Obama has won, my Competitive Enterprise Institute
colleague Ryan Young
reminds us that “in short run, it means a midnight rush of
new rules is coming.”
Yet even among the many burdensome regulations entrepreneurs
face, the Basel rules are unusual for a number of reasons: their
extreme stringency, complexity, lack of accountability, and — one
a sign of hope — their unpopularity with many members of
both parties. The entire Maryland congressional delegation, mostly
consisting of liberal Democrats such as House Majority Whip Steny
Hoyer and House Budget Committee Ranking Member Chris Van Hollen,
recently
wrote of their concerns in a letter addressed to regulators
from the Federal Reserve Board, Federal Deposit Insurance
Corporation, and the Office of the Comptroller of the Currency.
The lawmakers stated, “[W]e strongly encourage you to avoid
needless complexity and consider the impact any new framework will
have on traditional depository institutions that provide credit to
consumers and small businesses in our communities.”
CEI also joined in a
letter, sent to the Senate Banking Committee, that was signed
by groups representing many sectors of industry, including the U.S.
Chamber of Commerce, the Property Casualty Insurers Association of
American, and the National Association of Home Builders. We wrote
that the Fed, FDIC, and Comptroller “have failed to consider the
impact of Basel III upon Main Street businesses.”
Given that we now know where the financial problems are located,
Basell III’s logic is extremely unsound. Under the accord, a U.S.
community bank would have to put up much less capital to buy a
teetering European bond than to make a mortgage or business loan to
a customer it has dealt with for years. As the Wall Street
Journal noted in a recent
editorial (subscription required):
“Their new rules encourage banks to load up on sovereign debt.
This makes perfect bureaucratic sense, since the world’s
governments have proven to be handsdown the issuers with the most
dishonest accounting. The FDIC’s own Director Thomas Hoenig sees in
Basel III the same complicated system for judging risk that failed
in Basel II ‘but with more complexity’”
Basel III also imposes one-size-fits-all standards without
accounting for underwriting standards and the quality of borrower.
A bank offering a mortgage with any type of balloon payment — or
adjustable interest rate — may be required to carry 200 percent
extra capital to cover the loan. Yes, some of those low
capitalization requirements were utilized by subprime operators,
but they are also the same kind of loans that community banks give
to borrowers with stellar credit.
Community banker Jim Purcell, head of the State National Bank of
Big Spring, Texas (and co-plaintiff, along with the conservative
seniors group 60 Plus, in CEI’s lawsuit against the Dodd-Frank
bank regulatory overhaul), has already
testified that Dodd-Frank has made it impossible to offer the
stable mortgages he previously made for decades. However they feel
about Dodd-Frank, both Maryland Democrats and
Louisiana Republicans seem to recognize that this dash of Basel
added to the already potent regulatory mix makes for a poisonous
recipe for community banks.
One of the many lessons of the 2012 elections is that while
conservatives should look for ways to limit government with
bipartisan support, they should never let the Left dictate the main
agenda or issues on the table. Since Hoyer and Van Hollen have —
to their credit — expressed doubt about the Basel regime, the
House majority party should give them the opportunity to put those
doubts to a vote as soon as possible.
In short, there’s no reason that during the “lame duck” session,
Congress can’t fix the Basel cliff and avert the biggest chunks of
the regulatory avalanche.
