Lawmakers Urge Regulators to Calibrate Basel III Endgame to Properly Reflect ABL Risks

Nine members of the House Financial Services Committee, led by Rep. Young Kim (R-CA), have sent a letter to financial regulators emphasizing that the Basel III Endgame proposal must be properly calibrated to account for the risk-mitigating features of asset-based lending (ABL). Addressed to Federal Reserve Chair Jerome Powell, FDIC Chair Martin Gruenberg, and Acting Comptroller of the Currency Michael Hsu, the letter underscores the critical role ABL plays in financing U.S. businesses, particularly small and medium-sized enterprises.

SFNet has been actively educating policymakers on the importance of capital rules that accurately reflect the risks of ABL. In their letter, the lawmakers highlight a critical concern: the current proposal fails to distinguish between unsecured loans and loans secured by highly liquid collateral. They note that the pre-Basel III framework provided flexibility in capital calculations by recognizing these risk-reducing features. Eliminating this flexibility could unnecessarily increase capital requirements for ABL, despite its well-documented history of minimal losses.

With over half a trillion dollars in outstanding ABL loans, the letter warns that the potential consequences of the proposal are significant. Restricting this critical source of financing could raise costs for businesses and limit their access to working capital, particularly during times of economic stress. While Federal Reserve Vice Chair for Supervision Michael Barr has indicated that some changes to credit risk calculations are under consideration, the letter argues that these adjustments potentially do not go far enough.

The timing of this letter is particularly significant, as regulators have suggested that major rulemakings like Basel III may be delayed until after the presidential transition. By addressing these concerns now, the lawmakers aim to ensure that proper calibration of capital rules for ABL remains a priority in any future proposal, safeguarding a vital source of financing for U.S. businesses.