Endgame for Main Street Lending Basel III White Paper

Foxhall Parker
Director, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce


January 17, 2024


Businesses across the U.S. rely on bank loans to grow, innovate, and provide resources to their communities. However, a report from the U.S. Chamber Center for Capital Markets Competitiveness shows how proposed rules from the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) known as the ‘Basel III Endgame,’ may make it harder for businesses to access the financing they need to expand, innovate, and hire.

Basel III Endgame is a set of rules that will increase the amount of capital banks need to hold or “keep in the bank.” Specifically, the Federal Reserve estimates there will be a 16% increase in aggregate capital requirements across the banking sector. And this increase may be much higher for individual banks.

The justification behind Basel III—to enhance bank stability—is important. Yet, a comprehensive study spanning 21 years shows that the required capital buffers under these rules are overly cautious and not aligned with real-world scenarios.

Real Implications for Main Street Businesses

The implementation of Basel III Endgame is expected to disrupt the lending ecosystem, reducing loan availability and hindering economic growth across various sectors. This initiative, aimed at strengthening the banking system, could paradoxically inflict harm by limiting economic opportunity in the U.S.

The aspiring entrepreneur: Consider a bank looking at two similar loan requests from investment-grade companies: one from a well-known public company and another from a privately owned small business. Under the proposed Basel III Endgame rules, the private business will likely be charged more for the loan because the bank must hold more capital against those loans versus loans to publicly traded companies. Approximately 99% of businesses in the U.S. are private. This means that over the life of the loan, a small business will end up paying more in interest than the larger company simply because one is a public company and one is privately owned.

  • “How will the entire business ecosystem readjust to these bank capital requirements? There'll be all kinds of unanticipated effects,” said Rep. Bill Foster (D-IL), Ranking Member of the House Financial Institutions and Monetary Policy Subcommittee at the U.S. Chamber’s Protect Main Street Lending event featuring bipartisan representatives from Congress and a Federal Reserve Board Governor.

The small business tenant: We are already seeing a squeeze on the commercial real estate market in the wake of the COVID-19 Pandemic. The rule would further exacerbate this strain by increasing capital requirements on commercial real estate lending. This could result in higher costs for the business tenants currently occupying real estate or looking for new space. The result of increased costs may cause tenants to reduce the space leased or exit leases altogether, which could reduce retail options such as restaurants or shopping for consumers.

  • “There's going to have to be a lot of refinancings at higher rates,” noted Rep. Andy Barr (R-KY), Chair of the House Financial Institutions and Monetary Policy Subcommittee, said during the event. “We need the banking sector to be resilient and be able to deploy that capital.”

The family farmer: Farmers often use financial agreements called derivatives to protect themselves from unexpected changes in the price of crops and livestock, like bad weather or other risks. These contracts help ensure the stability of a farmer’s business. However, under the new Basel III Endgame rules, since banks must keep more money on hand, these types of hedging contracts become more expensive or less available, leaving some farmers more vulnerable to things like droughts that damage the harvest.

  • “Farmers, ranchers, and agricultural producers that use derivatives to hedge price risks have noticed that the increased cost of providing these services from the proposal could lead banks to limit their ability availability,” Federal Reserve Governor Michelle Bowman explained during the event.

The Bottom Line

The proposed Basel III Endgame rules will cause banks to lock up funds that could otherwise fuel new and existing businesses of all sizes. This negatively impacts the U.S. economy, from aspiring entrepreneurs to consumers supporting local businesses, which will be hit the hardest. The Federal Reserve, FDIC, and OCC should study the costs to businesses and the overall economy and then repropose these rules to maintain a regulatory environment that fosters economic growth.

Endgame for Main Street Lending Basel III White Paper

About the authors

Foxhall Parker

Foxhall (Fox) Parker is the Director for the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce where he works on banking and insurance policy.