Started seeing stuff about this a few weeks ago, seems pretty important, but why are big US banks seemingly against it? Would this have effects on the global economy?
[What is Basel III Endgame](https://www.brookings.edu/articles/what-is-bank-capital-what-is-the-basel-iii-endgame/)
[US Bankers Dont Seem Thrilled](https://youtu.be/f6EgrVtJoq4?si=CZ1GQ4dKYCIFs-Kn)
[US House Committee on Financial Services Stream](https://www.youtube.com/watch?v=_tTtxz8LzuI)
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In: Economics
The Basel Committee was established by a group of nations to create a set of rules for banking supervision — things like capital and liquidity. Since banks and people are becoming more globalized, it made sense to have a set of global rules on how we have a stable system. If everyone has strict rules and the US banking system doesn’t, and the US banking system collapses, it can take everyone else down too.
There were a set of agreements that came out of the Basel Committee over the years, but the most prominent today is Basel III (which is different from Endgame). Basel III was established after the Great Financial Crisis in 2007-08 to establish new rules for how banks must hold capital to be able to cover losses — the most prominent is CET1%, which measures how much equity your bank has as a percentage of your risk-weighted assets. There are also leverage requirements, liquidity requirements, and a host of other tools/frameworks for managing risk.
Basel III Endgame is the final set of rules being rolled out from the Basel III accords. The short version of a very long and technical story is that the US implementation will require banks to hold more capital. In many cases, a LOT more capital. Banks don’t want to hold more capital than they deem necessary, because capital you are holding onto is capital that is not being used to grow your business.
So if you ask Jamie Dimon, the CEO of JP Morgan Chase (the world’s largest bank), he thinks his bank is already very well capitalized, that they understand their risks, that Federal Reserve-mandated stress testing shows that they are able to withstand even the worst scenarios that are presented to them.
Proponents of the new rules would say that the current measurement frameworks do not adequately capture the risks that banks are taking in things like trading, or areas with higher operational risk. So requiring banks to hold more capital for perceived risky behaviors will either prevent them from entering risky businesses, or at least hold enough capital to withstand the losses that could arise.
There is probably some truth to both sides of the argument. Is every bank positioned like JP Morgan to withstand adverse markets? Probably not. But it will make lending in some areas more difficult, and banks will pull back lending in those areas. Or lending will go to companies who aren’t regulated by the Basel III accords. It basically comes down to your view of whether or not you think the banking system is currently adequately capitalized, or if you think there is a serious risk of collapse if bad things happen.
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