Would the Basel III Capital Proposal Improve Access to Credit?

Originally published at InsideSource's DC Journal.

Families and businesses are already squeezed by high borrowing costs and tighter credit; Washington should not be making lending even harder. Yet, that is what the earlier Basel III endgame push risked doing.

The good news is that the Federal Reserve’s revised capital proposal is a meaningful improvement. It does not abandon safety and soundness. It does something smarter. It takes a more evidence-based approach and reflects a more accountable regulatory process than the prior version.

That matters because bank capital is important, but capital is not free. Strong capital buffers help banks absorb losses. When regulators require banks to hold more capital than actual risk justifies, they make lending more expensive and less available. That affects more than bank balance sheets. It affects small-business financing, mortgage credit and private investment.

When Washington overregulates bank capital, Americans pay for it through tighter credit and weaker growth. What makes this proposal better is not just that it may reduce some burdens. It is that the agencies appear to have learned from the last failure.

The Fed’s fact sheet says the new proposals result from a “comprehensive, bottom-up review” of the capital framework designed to ensure requirements are appropriate and do not create unintended effects. It also says regulators considered overlaps among requirements and sought to mitigate them where appropriate. That is what accountable rulemaking should look like.

Washington rarely works that way. Too often, regulators act first, overreach second and justify later. This time, at least to some degree, they reassessed the evidence and adjusted course.

The agencies say the proposal would streamline capital requirements and better align regulatory capital with risk. That is the right goal. A free-market approach does not mean no rules. It means rules should be limited, targeted and tied to actual risks rather than to broad bureaucratic instincts to tighten control just because it sounds tough.

That is why Federal Reserve Vice Chair of Supervision Michelle Bowman’s March 12 speech at the Cato Institute mattered. She previewed changes that would “eliminate overlapping requirements,” “right-size calibrations to match actual risk,” and produce “more efficient regulation.” She also made the broader point that banks should be “better positioned to support economic growth” while preserving safety and soundness. That is a much healthier way to think about regulation than the old one-size-fits-all approach.

Here is the most important point for lawmakers: Even the Fed’s GSIB surcharge proposal now acknowledges that if regulators overestimate systemic risk, they can discourage banks from engaging in productive economic activity and lead to the under-provision of financial services.

The proposal goes further, stating that more accurate surcharges would likely reduce marginal funding costs and could enable some large banks to increase economic activity and the supply of financial services. It even cites empirical evidence that lower GSIB surcharges could increase loan supply.

That is a fancy regulatory way of acknowledging a basic market truth: overregulation restricts credit, while smarter regulation helps capital flow to productive uses.

This is not some narrow fight about bank lawyers and compliance manuals. Credit is the lifeblood of a growing economy. Families need it to buy homes.

Entrepreneurs need it to start businesses. Employers need it to expand payrolls and invest in equipment. When regulators make capital unnecessarily costly, they are not just “being tough on banks.” They are making it harder for the private economy to work.

None of this means the job is finished. Basel III remains a sprawling framework, and regulators should continue to simplify rules, tailor them to bank size and risk profile, and avoid one-size-fits-all standards that ignore the diversity of the banking system. Community banks, regional lenders, and the largest global institutions are not the same. Pretending otherwise is one of the oldest mistakes in financial regulation.

Still, this proposal deserves support. Not because it is perfect but because it is better. It reflects more humility, more evidence and more accountability than the earlier version. That is good for banks, good for borrowers and good for growth.