Basel III endgame favors traditional commercial lending
The guest argued that the US implementation of the Basel III endgame will structurally benefit traditional commercial lending by lowering risk weights, while disfavoring trading and investment banking activities.
The argument
Under the proposed framework, risk weights for residential mortgages, commercial real estate, and investment-grade corporate lending will become more risk-sensitive and generally lower. Although point-in-time capital requirements for trading activities will rise, the guest noted that simultaneous reductions in stress-testing buffers are expected to partially offset this headwind for large universal banks.
The thesis, stress-tested
✓ What validates it
- ✓Final US rule publication confirming lower risk-weight calibrations for residential and corporate loans
- ✓An expansion in net interest margins or loan volumes for major commercial lenders post-implementation
▸ Risks discussed
- ▸Regulators are concerned banks may use capital relief for share buybacks and dividends rather than expanding loan portfolios
- ▸Siloed regulatory bodies (Fed, FDIC, OCC) may fail to align point-in-time rules with stress-testing adjustments
Hear it yourself
"So that that is a that's an excellent question, and and this is one of the criticisms that the industry had, of the federal banking agencies back in 2013 is that, all of these requirements together, they they sort of operate together to to provide binding constraints for banks. And so balls of the grand game refers to point in time capital requirements. What I mean by that is every quarter, you have to calculate capital requirements, you publish them, and and that's what the public sees. That's fine. There's also a GSIB surcharge, which gets updated every year, which is sort of a capital buffer for the very largest banks on top of that point in time capital requirement."
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