July 15, 2024 | Just when you thought that the Dog Days of Summer had finally arrived, a 20-year old with an assault rifle that reportedly belongs to his father tries to assassinate President Donald Trump at a campaign rally in PA. Fortunately the errant shot only clipped an ear, but the chilling footage shows that former president Trump has not lost any of his fight.
“Winning political campaigns is all about emotion; emotion is now completely on the side of the Republicans,” writes Mark Halperin. “Trump’s reaction and the iconic images are like nothing any of us have ever seen. Being defiant and theatrical in the face of being shot is unprecedented; it doesn’t even happen in the movies.”
Events of the past 30-days present a remarkable turnabout for President Trump compared with a year ago, and now impending disaster for the Democrats. With the prospect of a Republican sweep in November led by Donald Trump at the top of the ticket, it’s time to start pondering how to unwind four years of progressive destruction in the worlds of banking and housing finance. As you read this comment, recall our earlier discussion of Trump's planned revisions to Executive Order 12866.
At the outset, success in terms of Washington policy requires that the Trump White House have a strong chief of staff and that the process for vetting and putting candidates through the Senate confirmation process is well-organized. That was not always the case in Trump I. If conservatives do not put qualified candidates through the Senate confirmation process, then nothing will change in Washington. We need many hands to drain the swamp.
In the world of banking, the obvious question to ask is whether President Trump should repudiate the Basel III Endgame proposal put forward by the Biden Administration. Short answer, yes. Basel III represents the European view of bank regulation. Dozens of members of both parties have already called upon President Biden to walk away from the bank capital rule and start again.
Last November, U.S. Senator Mike Crapo (R-IH) joined Senate Committee on Banking, Housing, and Urban Affairs Ranking Member Tim Scott (R-SC) in sending a letter with 37 colleagues urging the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) to withdraw the Basel III Endgame proposal. They wrote:
"We have serious concerns that, as proposed, Basel III will restrict billions of dollars in capital from those who need it most, resulting in costlier and more limited access to credit for millions of Americans. This would create severe, adverse impacts on the entire U.S. economy, from every day American consumers to the small businesses that are the backbone of our economy."
Our view is that the Basel III Endgame proposal is a mess and cannot merely be revised to deal with all of the shortcomings (“Comments on Basel III Endgame”). The additional capital overlays in Basel III will force US banks to actually shrink assets, particularly mortgage and other consumer assets, increasing the cost of credit. But the bigger question facing President Trump is whether to walk away from the Basel Accord entirely and put regulation of the US banking industry back into American hands.
The Basel Accord, let us not forget, is the creation of former Federal Reserve Board Chairman Paul Volcker and his colleagues at the Fed, who worked at the various Group of 10 central banks in the 1970s. We was there. In 1975, Dad actually quizzed us during dinner in Cleveland Park about the "Basel Agreement" and the failure of something called the "Herstatt Bank."
The failure of Bank Herstatt became one of the landmarks of post-war financial history and led to the creation of the Basel Accord. Yet the days of uncertainty and crisis that drove cooperation five decades ago have been succeeded by regulatory dysfunction. The divergence between the US and Europe on many aspects of bank supervision and capital regulation begs the question as to why the US remains in the Basel Accord at all.
For example, European regulators despise single family housing assets and prefer to have all housing finance under state control. But there are many many other types of finance used in the US that are subject to regulation because of the preferences of European regulators. Everything from tax assets for clean energy to asset backed securities for auto loans and credit cards are more regulated under Basel III.
EU regulators do not recognize any intangibles as valid capital assets for banks, directly opposing the US practice of recognizing payment intangibles at the point of sale of the loan. Regressive European thinking on housing has poisoned the discourse inside US regulatory agencies such as Fed, which now treat payment intangibles such as mortgage servicing rights (MSRs) as a "problem."
Likewise other agencies such as Ginnie Mae, HUD and even the FDIC parrot the erroneous concerns about MSRs instead of recognizing the value of these assets. What is the single most stable, sought after asset in finance today? MSRs. And cheap since they still only trade on 5-6x cap rates! Don't forget to read our upcoming biography of Stan Middleman, a man who knows something about mortgage lending and MSRs.
Reflecting European mores generally, American regulators view small banks and nonbank lenders as a problem that needs to be solved via consolidation and with minimum public fuss. In Europe, the government has a monopoly on much of secured finance, leaving the private banks with the scraps. Many EU regulators would be glad to see all banks under state control, one reason why there is no private bond market or significant economic growth in Europe.
Many senior US officials in the Biden Administration share the European contempt for smaller banks and businesses. But fortunately the US is moving in a very different direction from Europe. With the landmark Supreme Court decision in Loper Bright Enterprises v. Raimondo, overturning Chevron USA v. National Resources Defense Council, much of the rule making by the Fed and other prudential regulators is exposed to attack.
With the end of the federal judiciary's forty-year-old practice of deferring to agencies' reasonable interpretations of ambiguous federal laws, President Trump arguably has a duty to walk away from the Fed’s creation of Basel and begin again. The Basel Accord is one of the single biggest examples of a regulatory agency literally creating a new law from whole cloth. The fact that Paul Volcker is one of the authors does not give legitimacy to the Basel Accord. Basel is an illegal treaty between nine other nations that has never been presented to the Senate of the United States for ratification.
Yet despite this significant legal defect, the Basel Accord has been used as the basis for rule making for US banks over the past several decades. The Basel Accord was never been formally adopted or endorsed legislatively by Congress. For example, 12 CFR § 252.143 refers to the Basel Committee's capital requirements applicable to foreign banks being acceptable for US law, but otherwise Title 12 does not refer to the accord at all.
“US regulatory capital requirements are broadly derived from regulatory capital standards maintained by the Basel Committee,” notes Mayer Brown (“A ROAD NOT TAKEN: WHERE THE US CAPITAL PROPOSAL DIFFERS FROM BASEL”). “The international standards were revised in 2017 by the Basel Committee, but, as with all US regulations, the changes are not binding on US banking organizations unless and until US regulators formally adopt them through the notice and comment rulemaking process.”
Of course, this assumes that the rule process with respect to Basel was valid in the first instance and now particularly in the wake of Loper. Nobody told Paul Volcker to cooperate with his counterparts in Europe. He just did what seemed like a good idea in the very different world of the 1970s. Volcker describes the process in his excellent 2008 Fed Oral History interview.
So basically US banks are regulated under rules developed by a conclave of learned bureaucrats in Basel, Switzerland, and then changed and endorsed by the Federal Reserve Board and other regulators via a rule making process? The unofficial, consultative nature of the Basel Committee is documented on the website of the Bank for International Settlements.
The Basel bank capital rules and accounting conventions reflect a European perspective that limits growth and is unsuited to managing the risks of banks operating in the US economy. Volcker himself alluded to the difficulties of aligning the US regulations with the other member of the G-10 in a November 2011 essay in The New York Review of Books:
“We do need, however, to be conscious of the practical difficulties and limitations of setting capital and liquidity requirements. Those problems have long been evident in the effort to enforce the standards established by the earlier Basel agreements. Not surprisingly, they reappear in the ongoing negotiations to strengthen those standards. We see differences in national perceptions, reinforced by intense lobbying by affected institutions, whether central banks, commercial banks, or investment banks. In establishing standards for banks the tendency may be to bend toward a least common denominator, weakening the standards and allowing them to be unevenly applied. Resisting such pressures must be a priority for regulators.”
It’s time for the Congress to reclaim control of bank regulation in the US. Obviously in the post-Chevron world, a large bank or industry organization could sue the Federal Reserve Board et al to block implementation of the 2017 Basel Accord. Indeed, an enterprising plaintiff might seek to void the whole construct of bank regulation based upon the Fed’s work over the past fifty years.
But really this sounds like an issue tailor made for President Trump and the House Republican Caucus. There is no legal basis for the Basel capital rule and somebody in Congress needs to publicly call out the Fed on this small point. And remember, once President Trump signs EO 12866, the Fed and other agencies must "report up" to the White House, Office of Management and Budget, and the Treasury on bank regulatory matters where Congress is silent.
Fifty years ago, it made sense for officials at the Federal Reserve like Paul Volcker to manage banking regulation through secret, informal channels to the Bank for International Settlements. This arrangement suited the largest banks, which were insolvent at the time due to loans to Third World debtor nations. Mexico, Brazil and China all paid off their debts, but the big banks are still insolvent. Go figure.
Today such a situation where the Fed and the Basel Committee set US public policy is intolerable, especially if American banks must operate under oppressive European rules that increase the cost of home ownership for American families. The whole framework of Basel capital rules and risk weightings need to be discarded in favor of new legislation from Congress that reflects American priorities.
We propose that President Trump and his policy circle seriously consider walking away from the failed Basel Accord and instead put in place a modern bank capital framework that is designed for the US economy in 2025. Regulators do not need legislation to propose new bank capital rules, but we can no longer take direction from bureaucrats sitting thousands of miles away in a foreign nation who do not share American views of banking, finance and growth.
In our next issue, we'll be digging into reader questions on Q2 2024 earnings. So why the
pop in defaults for JPM's HELOC book? Keep those questions and suggestions coming. info@rcwhalen.com We'll answer in the blog or @rcwhalen on X.com.
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