WGA Criticizes Basel 3 Endgame Proposal

"Basel Rule Hurts Consumers and Banks Needlessly," says Whalen Global Advisors

WGA LLC

Whalen Global Advisors has released its comment letter on the final components of the Basel III agreement, also known as the Basel III endgame (“B3E”). The letter is sharply critical of the proposal, which WGA says does not address the true risks facing US banks. The letter also criticizes the Fed's continued regulatory policy on residential mortgage lending and mortgage servicing assets.

“This proposal reflects a view of financial risks facing US banks that is decades out of date and ignores the public record regarding recent bank failures,” notes WGA Chairman Christopher Whalen. “Specifically, the current proposal continues the historical focus of Basel on credit risk and gives too little weight to market risk."  

Whalen writes that the Basel framework going back to the 1980s is focused on maintaining sufficient capital to absorb credit losses. Yet the collapse of Silicon Valley Bank suggests that market risk is by far the larger concern today than in 1988. The letter notes that the mark-to-market losses facing US banks dwarf actual credit losses to banks going back a century. Interest rate volatility is the key variable when it comes to risk in 2024, the letter states, yet the proposal seems to be defending the regulatory status quo. 

“B3E and the previous iterations of Basel focus on a measure called ‘risk weighted assets,' yet nominal assets are what really mattered in the case of Silicon Valley Bank,” Whalen notes. “Whether the assets were held ‘available for sale’ or ‘held to maturity’ did not matter" to the short sellers attacking SVB’s stock."

The letter also criticizes regulators for their continued regulatory policy on residential mortgage lending and mortgage servicing assets. The letter asks the Board and other agencies a basic question: Do we want to destroy the market for residential mortgage finance in the US?  

“US regulators operate from the false assumption that mortgage servicing assets represent a risk to banks, but this is inaccurate,” notes Whalen, who has published a number of scholarly papers on the topic in recent years and writes a column for National Mortgage News

“If regulators truly understood the positive role of negative duration mortgage servicing assets in preserving and growing bank capital, the Board would be seeking to lower the capital requirements instead of raising them,” notes Whalen. “Why are regulators worried about MSAs? Largely because of interest rate volatility caused by the actions of the FOMC.”

About Whalen Global Advisors LLC

Whalen Global Advisors LLC (WGA) is a New York-based consulting, risk analytics and publishing company that focuses on financial institutions and global markets. WGA publishes The Institutional Risk Analyst (ISSN 2692-1812), including commentary on the capital markets, industry reports and company profiles. For additional information, please contact us at info@rcwhalen.com.

Source: WGA LLC

About Whalen Global Advisors LLC

Whalen Global Advisors LLC is a New York-based consulting firm that focuses on the the banking, mortgage finance and fintech sectors.

Whalen Global Advisors LLC
P.O. Box 8903
Scarborough, NY
10510-8903

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