Investment bank Goldman Sachs is pressuring the government to abandon a rule it says could tighten access to capital among small business owners, according to an exclusive report by Axios.
The proposed regulation, a Basel III reform nicknamed “Endgame,” would alter the way risk-weighted assets are calculated, forcing lending institutions to weigh a multitude of new factors when managing their finances and keep larger sums of cash on hand before allocating any capital. Basel III policies are developed by the Basel Committee on Banking Supervision (BCBS), an international panel whose recommendations are followed globally, including in the U.S. This summer, American federal regulators announced plans to adopt the Endgame proposal, several months after a sudden wave of U.S. bank collapses starting with Silicon Valley Bank (SVB) in March.
Although advocates of the rule say the change would improve transparency, reinforce stability and provide a clearer picture of risk, detractors such as Goldman Sachs worry that it would instead lead smaller banks to exercise more caution, ultimately hurting credit access for “riskier” loan applicants. To fight Basel III Endgame, Goldman Sachs has launched a series of advertisements explaining the potential consequences for consumers and small businesses and calling on the Federal Reserve to “stop the squeeze.”
Goldman Sachs is not alone in voicing its opposition to Basel III Endgame. Earlier this year, a group of banking executives, including JPMorgan Chase CFO Jeremy Barnum, expressed concerns that increased capital requirements would increase credit costs. Ernst & Young have called the new regulation “a sea change for the U.S. banking industry” that “would modify how the largest U.S. banks think about regulatory capital, and extends more granular, rigorous requirements to U.S. regional and mid-sized banks.”
Leaders of non-banking institutions, such as President David Dworkin of the National Housing Conference, have also challenged the policy, arguing that it would unfairly impact poorer communities. In a statement released in September, Dworkin writes, “The proposed rule would increase the risk weighting of bank-originated mortgages with down payments below 20%, discouraging banks from making loans to low- and moderate-income homebuyers.”
The exact consequences of adopting Basel III Endgame are far from clear, however. At its heart, the proposal seeks to address a lack of financial scrutiny among lending institutions, a behavior that has contributed to multiple economic cataclysms, including the 2008 financial crisis and the SVB crash this spring. Conceivably, placing additional requirements on banks that force them to exercise more caution could, over time, stabilize the economy, especially during periods of recession, natural disaster or international conflict.
Arguing that this stability could only be won through the sacrifice of small business success is a bold claim for larger banks, such as Goldman Sachs, to make, considering that these institutions exert considerable control over who receives capital and who does not. Nevertheless, it is clear that reform is needed. Learning more about the regulations that could impact their bottom dollar will help small business owners identify both their own financial strategies and the lawmakers or advocates they should to support.
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