Proposed banking regulations under contention in Congress would disproportionately hurt average Americans while not addressing the current issues in the banking system, experts told the Daily Caller News Foundation.

The Senate Banking Oversight Committee met with top U.S. bank CEOs on Wednesday about the possible effects of new regulations, proposed in July, that would raise capital requirements, titled Basel III endgame, according to CNBC. The new restrictions would not tackle problems that caused the most recent banking crisis earlier this year and would disproportionately affect smaller borrowers, like average Americans, by tightening credit conditions and restricting access to affordable debt in the form of mortgages, credit cards and more, experts told the DCNF.

“I think the burden of this regulation will fall disproportionately on individual borrowers and small businesses, whereas very large corporate borrowers or other large institutions will pay a proportionately smaller amount of this regulation,” E.J. Antoni, a research fellow at the Heritage Foundation’s Grover M. Hermann Center for the Federal Budget, told the DCNF.

The Basil III endgame regulations stem from proposed international reforms following the 2007 Global Financial Crisis that resulted in a number of large banks being bailed out, according to Brookings. The most consequential portion of the proposed rules deal with requirements for banks holding $100 billion or more of assets, which covers around 75% of the current banking system, requiring that they hold an additional $2 of capital for every $100 that is being lent.

“What’s going to happen is that makes that credit less profitable for the lender,” Antoni told the DCNF. “And so then the only way the lender is actually going to offer that credit is going to be at a higher interest rate because they have to offset the additional cost with additional revenue, and their revenue obviously comes from the interest on loans. So effectively, what you’re going to do is raise the cost of credit and raise the interest rate on all these different types of credit. So it could be a mortgage, it could be a credit card — lots of different things.”

Credit conditions are already tight, with high mortgage rates leading to increasingly unaffordable homes for the average American. The average for a 30-year fixed-rate mortgage reached a recent peak of 7.79% on Oct. 26 and has since moderated slightly to 7.03% as of Dec. 7, according to the Federal Reserve Bank of St. Louis.

Following tighter credit conditions, the number of delinquencies on credit cards is rising at the fastest pace since the 2007 Global Financial Crisis as interest rates rise. Delinquency transitions increased in all categories except for student loans in the third quarter of 2023, with credit cards and auto loan debt seeing the largest changes, rising 8% and 7.4%, respectively.

The unrealized losses remain, ahem, material in the US banking system

The system is backstopped by the Fed but e.g. the BTFP is scheduled to end on March 11, 2024 pic.twitter.com/huNkgC7E50

— AndreasStenoLarsen (@AndreasSteno) December 8, 2023

“In my view, Basel III endgame rules have nothing to do with fixing the issues that brought down [Silicon Valley], First Republic and Signature banks earlier this year,” Paul Kupiec, senior fellow at the American Enterprise Institute, told the DCNF. “Regulators already have sufficient prompt corrective action powers that they could have used — but did not use — to prevent those failures.”

The financial sector faced a crisis in March when the mid-sized Silicon Valley Bank collapsed following a bank run, leading other regional banks, First Republic and Signature, to follow suit. Emergency actions were taken to prevent a wider banking collapse, with the Federal Deposit Insurance Corporation (FDIC) bailing out depositors and taking on some assets from the banks.

“In my view, the banking system is not well capitalized at present, but it is unrealized interest rate-related losses (from Fed rate increases) that have eroded the banking system’s risk-absorbing capital, and Basel III endgame rules do not address this most basic flaw in the current system of regulatory capital requirements,” Kupiec told the DCNF. “Interest rate-related losses are, after all, what caused the [savings and loan] crisis of the 1980s.”

The Federal Reserve has raised its federal funds rate to a range of 5.25% and 5.50%, the highest point in 22 years, in an effort to bring down inflation, which peaked at 9.1% in June 2022. For the third quarter, banks’ unrealized losses, meaning assets owned by the banks that have fallen in value but have not been sold, grew to $683.9 billion, owing to higher market interest rates and mortgage rates, according to the FDIC.

“One of the things these regulations do is make it almost impossible for smaller institutions to be profitable,” Antoni told the DCNF. “The bigger institutions are the only ones that can meet these regulatory requirements and survive. And now you have created the very thing you were trying to allegedly prevent, which is ‘too big to fail.’ Now when these institutions do get into trouble, what happens? The taxpayer has to step in, pick up the tab and backstop them.”

Will Kessler on December 10, 2023