As if the "fiscal cliff," with its prospects of looming tax hikes, were not enough, big and small banks—and in turn consumers and businesses who rely on their credit—also face the "Basel cliff."
The Basel cliff is not a mountain in Switzerland. It refers to meetings in Basel and elsewhere by international banking bureaucrats to develop the Basel III agreement for harmonizing international capital requirements. And if implemented as planned, it will dramatically increase the costs of mortgage 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 spurred some slightly improved growth measures in 2012. Now, as CEI's Ryan Young reminds us, "in short run, it means a midnight rush of new rules is coming."
But the Basel rules are unusual for a number of reasons: their extreme stringency, complexity, lack of accountability, and—in a sign of hope -- their unpopularity with 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 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 to the Senate Banking Committee with 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 where we now know the financial problems are, Basell III's logic is also 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 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 making 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 were utilized by subprime operators, but they are also the same kind of loans utilized by community banks to borrowers with stellar credit.
Community banker Jim Purcell, head of the State National Bank of Big Spring, Texas (co-plaintiff in CEI lawsuit against the Dodd-Frank bank regulatory overhaul) has already testified that Dodd-Frank had made it impossible to offer the stable mortgages he 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.
So there's no reason that during the "lame duck," Congress can't fix the Basel cliff and the biggest areas of the regulatory avalanche, as well as mitigating the fiscal cliff.