Fed considers changes to Basel III amid industry opposition

The Federal Reserve is evaluating potential changes to the upcoming Basel III regulatory framework, a move that could reshape the bank capital regulatory landscape. Michael Barr, the Fed’s vice chairman for supervision, said the central bank was considering changes, particularly in its operational risk calculations and treatment of mortgage servicing.

The development marks a significant change as the banking industry expressed strong concerns about the final Basel III proposals, saying they could inadvertently lead banks to reduce lending. The Fed’s openness to revisions signals recognition of these concerns and an effort to balance regulatory goals with economic needs.

Speaking on Tuesday, Barr emphasized the importance of public feedback, which has played a key role in shaping the Fed’s stance on operational risk and fee benefits in the context of Basel III. The central bank will also publish the results of a survey examining the impact of the proposed reforms.

Barr said the goal is to ensure the rule of law promotes a strong economy that benefits low- and moderate-income communities and adjusts, especially when it comes to mortgages. He stressed the importance of public input in properly enforcing the rules.

In response to the recent banking crisis of 2023, Mr Barr referred to a lending scheme that was set up to deal with depositor activity at three banks with zero deposit levels. He described the scheme as an emergency measure, meaning it is unlikely to be extended as it is specifically designed to ensure banks have the liquidity they need during the crisis.

The Federal Reserve’s consideration of amending the Basel III accord highlights the delicate balance regulators must strike between ensuring financial stability and supporting economic growth. The results of these considerations could have important implications for the banking industry and the wider financial system.

Reuters contributed to this article.

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