Powell: ‘Broad and material changes’ coming to Basel III proposal

The Federal Reserve’s Basel III endgame proposal will likely face significant amendments before being finalized. 

During testimony in front of the House Financial Services Committee on Wednesday, Fed Chair Jerome Powell said he expects “broad and material” changes will be made to the proposal before the rule is finalized. 

He added that withdrawing the rule altogether — something called for by several Republican lawmakers — and putting forth a new proposal is a “live option” under consideration.

“The question we get is reproposal and I will say we haven’t made that decision but if, when we reach that point, that turns out to be the appropriate thing, we won’t hesitate to do it,” Powell said. “It’s a very plausible option. It will depend on how things lie when we reach that point.”

The revelation that Powell was open to significant changes to the proposal, which would amend risk-based capital standards for all banks with at least $100 billion of assets, was welcomed by large banks. Trade groups for the industry have been waging a costly and public opposition campaign against the package.

“We are encouraged by Chair Powell’s comments on the Fed’s review of the broad stakeholder comments on the capital proposal,” said Kevin Fromer, CEO of the large bank industry group Financial Services Forum, in a statement. “We agree, broad and material changes are needed to the proposal to avoid significant harm to the economy, businesses of every size and American households. To achieve that, we continue to believe that a re-proposal is the best approach to giving the public a well-justified and data-based rule that is consistent with the plans of other jurisdictions.”

Powell said the Fed Board of Governors is in the process of reviewing the nearly 400 public comments about the proposal, which was put forth last summer. He acknowledged that the vast majority — 97% according to analysis by the law firm Latham & Watkins — of feedback was made in opposition to some or all of the proposed rule. 

“It’s unlike anything I’ve seen,” Powell said.

During the three-hour hearing, the Fed chair noted that the board is still in the process of absorbing the commentary and is just beginning to think about potential changes to the proposal.

At various points during the hearing, Powell flagged the risk capital treatment of mortgage origination, derivatives clearing — particularly for contracts impacting agriculture commodities — and the overall impact on financial markets as areas of potential changes. He noted that many of these issues were already on the Fed’s radar and were included in the questions presented to the public alongside the proposal.

Powell also recognized the possibility that the framework — which would apply many regulatory requirements that were previously limited to global systemically important banks to all institutions with more than $100 billion of assets — could lead to more uniformity in the business models used by banks.

“I think it’s a real concern,” Powell said. “And, again, that’s something that goes into my thinking, certainly, about the proposal and where it needs to go.”

Powell also committed to factor in additional comments that will be collected relating to a quantitative impact study on the proposed capital framework. The study, which invited banks to submit data about how they would be impacted by the new standards, was launched in October and closed in January, the same time as the comment period on the proposal. 

“Vice Chair [for Supervision Michael] Barr did commit to putting the QIS out for comment,” Powell said. “We will receive those comments and they will be taken into consideration as we think about the path ahead.”

Powell also addressed the proposal’s internal divisiveness within the Fed as well as the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. It was put out for comment in July despite two FDIC directors and two Fed governors voting against the package and another two governors — including Powell — expressing strong reservations. Fed Govs. Michelle Bowman and Christopher Waller have continued to express concerns about the proposal in the months since, even calling for it to be withdrawn and reproposed.

“Under your tenure as chair, can you identify any other regulatory proposal which has elicited this much dissent?” Rep. Andy Barr, R-Ky., asked Powell during the hearing. 

“No,” Powell responded. 

Powell declined to delve into the details of the Fed’s comment review and response process, but he said he has not yet discussed the option of withdrawing the proposal with Fed Vice Chair for Supervision Michael Barr, who is tasked with setting the central banks regulatory and supervisory agendas. 

Yet, despite the divergent views on the initial proposal and the likelihood of amendments to it, Powell said he remains optimistic that the board can put forth a final rule with broad appeal.

“We’re evaluating the comments, we’re just coming to the place where we’ll start talking about the path ahead, and I am confident we’ll achieve very broad support on the board,” he said.