When we think about the Basel III implications, we are concerned about the implications for our underlying clients, said Michael Winnike, Director, Market Structure, BlackRock.
Speaking at the SIFMA’s Basel III Endgame Roundtable on April 18, Winnike highlighted two categories of issues.
One is the overall impact of excessive capital levels on the price and capacity for intermediation, he said.
The other is the idiosyncratic impacts of some elements of the proposal and the G-SIB surcharge proposal in particular, he added.
On Thursday, April 18, 2024, SIFMA hosted a second roundtable discussion on this critical issue, covering overall reflections on the Basel III Endgame proposal and an evaluation of the proposal’s impacts on U.S. capital markets, end users, and the broader economy.
With respect to the overall capital levels, Winnike said that BlackRock has aligned interest with regulators in making sure that the financial system and the banking system in particular is sound and secure.
“We have strong risk management professionals that look at the credit risk of counterparties we face,” he said.
Winnike commented that the reforms put in place by global financial regulators following the global financial crisis had made the banking sector materially safer.
However, they’re not convinced that simply putting more capital on its own into the system is “really the right target for enhancing safety and soundness by itself”, he stressed.
“Rather, we think that the rules need to be carefully targeted, so that you are incentivizing good risk management behavior with those capital rules, and that you’re aligning the capital requirements in an appropriate way with risk, and that you’re not having an outsize impact on any one business line, or client category that sort of isn’t rational relative to risk,” he added.
“We also think that these rules need to be appropriately calibrated in their aggregate so they don’t set capital levels so high that intermediation capacity of itself is unduly harm,” he said.
Winnike said the number of the stats given today suggest that the proposal will have a dramatic increase on capital requirements.
“We know from our own experience that ultimately the cost that we pay for intermediation and the total intermediation capacity goes down. Capital has a tangible impact on the overall costs for our clients,” he said.
When speaking about the idiosyncratic impacts, Winnike said that BlackRock is “deeply concerned“ about is the impact on clear derivatives markets.
“We rely on banks to access clearing houses, and we use these clear derivatives markets ultimately to hedge credit and interest rate risks in our client portfolios,” he said.
According to Winnike, the G-SIB surcharge proposal would materially increase the cost of banks providing agency clearing services by including agency clearing and the Internet connectedness and the complexity categories of G sibs choose surcharge s for calculation.
He noted that it just doesn’t make sense for policymakers to disincentivize clearing by imposing capital requirements that will materially increase the costs.
Winnike said the estimates are that the Basel III End Game proposal along with the G-SIB surcharge could increase the capital requirements by about 80% for these businesses.
He said that BlackRock is also concerned about the systemic risk. “If banks exit the agency clearing market, we are concerned that that could further concentrate risk among a smaller pool of clearing brokers,” he said.
The other area that hasn’t been getting as much attention is the implications for markets for exchange traded funds, Winnike said.
He said that the capital rules in place today treat ETFs with more punitive capital treatment than the actual underlying assets.
The G-SIB surcharge proposal exacerbates this uneven treatment by labeling ETFs as financial institutions, essentially capturing them and the interconnectedness component of the piece of surcharge calculation, he said.
“The end result is likely going to be less intermediation by banks leading to wider transaction costs for end investors,” he said.
Nevertheless, one of the things that BlackRock thinks is highly rational about the Basel III proposal is the idea that there should be differentiation of risk weighting by different client types, Winnike said.
“We have numerous clients that are subject to a high degree of regulatory oversight. So why implement a regime that unfairly increases cost for those classes of investors? I think many common letters afford alternative proposals for addressing this uneven agreement,” he said.
