An Open Letter to Fed Chair Powell: Recuse Yourself from Basel III Endgame
Federal Reserve Board Chairman Powell, you should recuse yourself from the consideration of the Basel III Endgame regulatory capital rule to preserve the integrity of Federal Reserve regulatory decision-making and avoid the appearance of impropriety that would undermine public perception of the central bank’s independence and impartiality.
As originally proposed by the Federal Reserve and other federal banking agencies in July 2023, the Basel III Endgame rule was intended to implement the final stage of the international bank capital framework designed to bolster the regulatory capital requirements to strengthen the banking system after the 2008 financial crisis.
According to Bloomberg, you met behind closed doors with large banks that would be subject to the rule on July 19, 2024. The reporting suggests that the purpose of the meeting was to encourage the banks to reach a consensus on an acceptably lenient level of regulatory oversight that banking regulators could implement without industry challenging them in court. You hosted this meeting a week after telling Congress to expect any Basel Endgame final rule to have “broad support among the broader community of commenters on all sides,” suggesting you will not support a final rule opposed by the big banks.
It is inappropriate for Federal Reserve officials such as yourself to allow regulated entities to whittle down regulatory standards and scrutiny to the level they believe serves their interests. Meeting with big bank CEOs in secret creates the appearance that powerful regulated entities cannot merely influence rulemaking during the public notice and comment period and through their policy arguments, but that they can meet off the record and set regulatory red lines which federal authorities will not cross.
Private, industry communications with regulators that occur after the public comment period has closed can create the impression of impropriety that suggests that the regulated industry can write the rules of the road. In Home Box Office v. Federal Communication Commission, the DC Circuit Court was “particularly concerned that the final shaping of the rules we are reviewing here may have been by compromise among the contending industry forces, rather than by exercise of the independent discretion in the public interest.”
The Administrative Conference of the United States recognizes that ex parte communications can create real and perceived harm to the integrity of the rulemaking process, including greater access to regulatory decision-makers by powerful interests or the possibility that non-public information could influence the rulemaking process and that “creates problems of perception and undermines confidence in the rulemaking process.”
The Basel III capital proposal is an important regulatory undertaking to strengthen the soundness and resiliency of large banking entities in the event of economic stress or disruption. The inability of major financial institutions to withstand the 2008 financial crisis and the spread of financial contagion throughout the economy had a profound and destructive impact on lower-income, Black, and Latine households and communities. A private meeting or meetings with the biggest banks to negotiate contours of capital regulation that will be acceptable to industry undermines the impartiality and independence of the Federal Reserve and its mandate to serve the public interest in financial stability.
We request that you recuse yourself from all deliberations and decision-making related to the Basel III capital proposal.
[Signed]
Americans for Financial Reform l Institute for Agriculture and Trade Policy l Revolving Door Project