Your Friendly Late-Summer Bank Regulation Roundup

Between Comet Nishimura, the latest machinations in Congress and a handful of IPOs, there was plenty of news Tuesday. Yet what caught our eye wasn’t the celestial marvel (thanks, fog), politicians or the corners of the Internet salivating over new listings, but rather some new nuggets surrounding some forthcoming banking rules. Not the most exciting arena, perhaps, but it is part of our ongoing coverage of such rules—and one that shows some things about how markets work. Let us take a brief look.

American Banks Want Regulations to Show Their Work

Back in July, the Fed, FDIC and Office of the Comptroller of the Currency released their final plans for the last stage of Basel III bank capital rules (also known as Basel IV or Basel III Endgame), which aim to patch some perceived shortcomings of the broader Basel III overhaul. At the time, headlines seized on this as a 20% capital hike for the biggest banks, causing widespread alarm about banks having to cut lending in order to build the extra buffers. As we noted at the time, this was all old news and not guaranteed to take effect as written, given the rules faced a lengthy feedback period, wouldn’t start phasing in until 2025—and wouldn’t take full effect until 2027. Meanwhile, banks were already increasing capital, making it quite likely they could amass whatever else they needed by retaining earnings over the lengthy implementation timeline.

Well, now the feedback is rolling in, and one piece from a consortium of industry groups made headlines Tuesday. According to the Chamber of Commerce, American Bankers Association and several others, the new rules violate the Administrative Procedure Act because regulators didn’t “disclose the data and analyses on which their rulemaking is based.”^[i] Accordingly, they are requesting that regulators try again and show their work.

Time will tell how they respond and how this pans out. It is possible it results in the rules getting watered down if it turns out the initial math wasn’t satisfactory. Or they might stay as-is but with more explanation behind them. Or it could all just be much ado about nothing. At this point, we doubt it matters much. Not when banks have been eyeing these new rules since well before the pandemic. The actual release in July simply brought clarity on what precisely the rules will look like. As the comment period winds down and regulators take the feedback in stride, perhaps we will get more clarity. Maybe the rules will be a skosh milder than what markets already priced in—and maybe not. Either way, it seems unlikely there will be some huge negative shock from here, particularly given the vast scrutiny these proposals are subjected to within and outside the industry.

Italian Banks Want Politicians to Rewrite Their Windfall Tax

American banks weren’t the only ones asking for revisions to new policies. Italy’s bank trade group, ABI, is also on the move, asking the government there to make some tweaks to the windfall profits tax last month. Its arguments run the gamut. In addition to citing the tax’s market impact and potential to raise banks’ funding costs and impede lending, ABI argued the tax potentially violates Italy’s constitutional principles and is based on a false premise. “‘The term extra-profit refers to a specific situation, one in which a company enjoying a monopoly or oligopoly position can set the price of its products by earning a profit higher than that which could be determined in a competitive market environment,’” said ABI head Giovanni Sabatini.^[ii] Italy’s banking industry, which is quite competitive with numerous players, doesn’t fit that description. Accordingly, ABI is asking the government to make changes, including excluding government bond holdings from the windfall calculation and making the windfall levy deductible from banks’ total tax bill.

It isn’t clear yet how lawmakers will respond. The government has already sanded down some of the tax’s rough edges in order to improve its chances of passing in Parliament. ABI’s objections might inspire some members of the three-party coalition government to push for more changes. Prime Minister Girogia Meloni says she is holding firm for now, but this wouldn’t be the first time she has tacked to the center in order to push legislation through. Either way, though we don’t think retroactive windfall taxes are a net benefit, this one seems relatively mild given it is time limited to this year and is capped at 0.1% of a bank’s assets. Markets moved on quickly from a similarly small windfall bank tax in Spain last year and are already moving on from Italy’s announcement. Moreover, just knowing the tax’s final form will give banks and investors more clarity, helping them move further past it.

Typically, with things like this, it isn’t the rules or taxes that hurt stocks but rather the impact of uncertainty on sentiment. Markets dislike rising uncertainty but appreciate falling uncertainty. We had the former, and now we are slowly, gradually getting the latter.