New Basel banking regulations may put smaller banks out of business

By
BrusselsReport.eu
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By Jorge Muñoz

What if the regulation designed to solve banking problems only ends up making them worse? This is the critical question surrounding Basel III Endgame, a framework which promises financial stability but risks crushing small banks and harming ordinary people in the process.

At the heart of this initiative lies the Bank for International Settlements (BIS), often referred to as the ‘central bank of central banks.’ Headquartered in Basel, Switzerland, the BIS oversees the Basel Committee on Banking Supervision (BCBS), a body established in 1974 in the wake of the Bretton Woods system collapse. Tasked with shaping global banking standards, the BCBS includes central banks and regulators from 28 jurisdictions and 45 members, wielding significant influence over the financial sector.

Basel III Endgame is the latest evolution of this regulatory framework, introducing measures with over $100 billion in assets to hold larger reserves which could have far-reaching consequences. While the term “Endgame” might evoke the blockbuster Avengers: Endgame, this regulatory initiative may have less popular recognition but far greater impact.

A key aspect of the Basel III Endgame is the requirement for banks to increase their capital reserves. Does this mean this measure will not affect the smaller banks? Sadly not. Instead, it categorises financial institutions into “secure” (large banks) and “insecure” (small banks) entities. Given a choice, most depositors would likely prefer to place their money in banks perceived as more secure. This dynamic could accelerate the movement of capital toward larger banks, especially during times of financial instability or if smaller banks face insolvency.

The affected banks will have to increase their capital reserves by almost 20%. As the Bank Policy Institute points out, this would limit the banks’ capacity to lend money. The implementation period will be between July 2025 and 2028. Even the World Economic Forum recognises the dangers of a bank that is too big to fail, but our approach is still stubbornly different.

Basel I and Basel II failed to prevent banking crises. Will Basel III be different?

As the German banker and economist Richard A. Werner points out, Basel I and II have failed at preventing major banking crises. It looks like unfortunately Basel III will take the same path.

The new regulations’ supporters would argue they will make the banking system more resilient. Instead of acknowledging the failure of Basel I and II, they claim those measures simply didn’t go far enough, hence the need for Basel III. In reality, Basel III, like its predecessors, was doomed from the start.

Whether regulators fail to understand the consequences of these measures or actively choose to ignore them is unclear. Each year, the concentration of the banking system is more pronounced, with fewer but larger banks. Rather than addressing the root of the problem, Basel III will deepen the divide between big and small banks, leaving smaller institutions defenceless when the tide turns.

In essence, Basel III Endgame represents a critical moment for the financial system. While its stated goal is to strengthen banks and reduce systemic risk, its consequences may tell a different story. Ordinary people will be the ones to pay for the consequences. Meanwhile, privileged banks and governments will emerge as the winners. For all those reasons, it is essential the Basel Committee pauses the implementation of these rules and drastically rethinks its approach.

 

Jorge Muñoz is a writer and policy fellow with Young Voices Europe. He holds degrees in Law and Business Administration, as well as an MBA. Jorge is also the founder of the social media platform Libertad Individual, which is dedicated to promoting the principles of liberty and has over 300,000 individuals engaging with its content.

 

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