WASHINGTON — Last week, Consumer Financial Protection Bureau Director Rohit Chopra took some questions from reporters after an appearance at DC Fintech Week. Most of the questions were about the bureau's newly finalized and just-as-newly litigated 1033 open banking rule, a much-anticipated regulation that was the talk of the town all week and the occasion for his visit to the conference.
So naturally I asked him about Basel III instead. That he answered the question at all was significant — he's been notably mute on the subject since
"I continue to believe that the United States needs to get a final rule implemented into place as quickly as possible," Chopra said. "It has very high stakes to make sure that the spirit of the Basel agreement is effectuated throughout the world, and we do not face the risk of bailouts and serious harms or a global financial crisis."
Chopra wasn't the only person in Washington that day thinking about the urgency of passing the Basel rule post-haste. Erik Thedéen, governor of Sweden's Sveriges Riksbank and chair of the Basel Committee on Banking Supervision — the international body that developed the Basel III endgame standards —
"The work to fix the banking system fault lines exposed by the [global financial crisis] is not done," Thedéen said. "We need to lock in the financial stability benefits of implementing the outstanding Basel III standards in full and consistently, and as soon as possible."
So why is there such an urgency around getting Basel over the finish line as soon as possible? One might assume it has to do with next week's election. If Republican presidential nominee and former President Donald Trump wins, the smart money would bet that many of the current regulators would be out of a job and the ones who take their places would scuttle the proposal entirely or just leave it on the back of the stove indefinitely.
But I don't think that's it. For one, even if every regulator were somehow visited in the night by the ghosts of Basel Past, Basel Present and Basel Future and awoke the next morning determined to change their ways and pass the original proposal as-is, the rule would still probably be unfinalized by the time the next president is inaugurated. Right or wrong, that ship has sailed.
Rather, I suspect that the issue with reproposing versus finalizing the rule is actually about the substance of what is in the final rule as it is about expediency and process.
The Administrative Procedure Act lays out the process by which executive agencies can issue binding regulations to covered industries, and that process is designed to afford those industries — as well as affected communities, interest groups and the public — a meaningful and fulsome opportunity to make their objections known and to give those objections a fair hearing. In practice, what usually happens is that regulators make a proposal, receive public comments on said proposal and finalize a rule that is typically less aggressive than what the regulators originally had in mind.
The Basel III endgame proposal is a good example of this dynamic. I'll just use round numbers here, but the original proposal introduced in July 2023 required the biggest banks to retain something like 20% more capital than they already do. The revisions described by Federal Reserve Vice Chair Michael Barr shave that down to more like 10%. But if the process then starts over again with a 10% capital raise as the opening bid, there is reason for someone like Chopra to believe that whenever that rule reaches finalization, the actual figure will be more like 5%. If you believe in your heart that big banks need to retain more capital to shore up market risk, operational risk and derivatives trading risk, then that makes the whole exercise seem pointless.
But having made his play, the ball is no longer really in Chopra's court. Barr presumably developed his revised Basel proposal with the goal of achieving consensus — or the closest possible approximation of consensus he could get — on the Fed Board of Governors. What that means in practice is gaining six of the seven votes on the board. (Fed Gov. Michelle Bowman, who has been vocal in her criticism of the proposal, is likely a bridge too far.) If whatever gets him six votes on the Fed board can't get him three votes on the FDIC board, then something has got to give.
Chopra and Barr are playing different positions here, but they are on the same team — they share the goal of tightening capital requirements for banks to make them less vulnerable to shocks and thus protecting the financial system as a whole. They are constrained, however, by two members of the FDIC board and somewhere between two and four members of the Federal Reserve Board with varying degrees of skepticism about what the proposal entails. That number includes Federal Reserve chair Jerome Powell, who sets the board agenda and has himself urged consensus on moving forward. So even with some give-and-take on the substance, they need a strategy to get Basel out the door.
One likely way that this square can get circled is to break up the Basel rule into pieces, finalizing the most agreeable parts and reproposing the stickier wickets. That satisfies Chopra's desire to put some points on the board while also addressing the concerns that skeptics on the Fed board may have about particular aspects of the rule. What parts get finished and which go back to the starting line is anyone's guess — as is whether Basel has a future this time next month, or where the courts will land when the rule is inevitably litigated. But despite the impasse at the FDIC, there is a path for the Basel rule to get done.
