A contentious rule proposal has a host of broker-dealer and investment firms calling for a rewrite as the effects on the municipal bond market portend calamity.
“Overall, we recommend that the rules in general be reconsidered and ideally rewritten,” said Susan Joyce, head of muni trading & FI market structure, AllianceBernstein. “We definitely see a lot of value in providing stability in the financial markets, we just don’t know how this (Basel III Endgame) will impact our clients, but it’s very much related.”
The comments came during a panel discussion produced by the Securities Industry and Financial Markets Association on Thursday as representatives of several firms added their voices of dissent about the proposed rule changes.
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“As you well know, there’s been widespread criticism of the proposal from across from many stakeholders across the entire political spectrum,” said Ken Bentsen, president and CEO, SIFMA. “Much of it is coming from far outside the financial services industry.”
The proposed rule changes would require banks to raise and hold more capital in reserve which could subject municipal bonds to standardized treatment while driving up borrowing costs for municipalities. Last
The proposal went live last July and is endorsed by a consortium of federal agencies including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System. Members of the Fed had concerns about the proposal before it was rolled out.
“We voted on this matter at a public meeting,” said Michelle Bowman, governor, Board of Governors, Federal Reserve. “If you go back and watch the meeting, you’ll see that a number of the members of our board expressed pretty significant concerns about the proposal and its contents, the way that it’s calibrated and what it chose to include.”
Even though most banking leaders remain opposed to Basel, the idea of forcing banks to boost their capital balances does have supporters. “Once risk-based capital is higher, funding costs at the banks will be lower,” said Darrell Duffie, Professor of Management and Finance at the Graduate School of Business, Stanford University.
“Creditors are not ignorant of the fact that safer banks are less likely to cause losses to creditors and they’re going to charge lower funding spreads.”
The impetus for Basel III stems from a desire to make banks less prone to failure, but banking experts point to a disconnect between the proposal and reality.
“They’re spending all this time and effort on capital proposal, which had it been in place would have made absolutely no difference to Silicon Valley Bank, First Republic or to Signature. It seems to me to be inappropriate at this time,” said Gene Ludwig, managing partner, Canapi Ventures.
The rules came into being courtesy of the Basel Committee on Banking Supervision which meets in Basel Switzerland and flies under the flag of the Bank for International Settlements.
U.S. representatives to the Basel Committee include the Federal Reserve Board, the New York Federal Reserve Bank, the Office of the Comptroller of the Currency, and the FDIC.
Once the proposal launched, it became a lively target for public comments that were supposed to end last November by then got an extension to January 2024. The American Securities Association responded via a letter signed by ASA CEO Chris Iacovella, which spelled out concerns regarding the effects on the municipal bond market.
Per the letter, “According to some analyses, the cost of capital for holding municipal bonds could increase by as much as 20% if the proposal were adopted. Institutions subject to Basel III will therefore be disincentivized from trading or holding these bonds. This will drive up borrowing costs for municipalities ultimately raising costs or shrinking project scope for communities all over the country.”