CBA Releases White Paper Detailing the Impact of Basel Regulations on Consumers on the Margins of the Financial System

The Consumer Bankers Association (CBA) today released an in-depth White Paper, “The Impact of the Basel III Endgame Proposal on Consumers on the Margins of the U.S. Financial System,” as part of its response to the recent capital requirements proposal from the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Given the Proposal’s sweeping impact on American consumers, the White Paper is written with lay readers and the general public in mind. CBA hopes to broaden the conversation to a wider range of stakeholders that care about consumer financial health, but who may have little expertise in bank regulation.

Commenting on the release of the White Paper, CBA President and CEO Lindsey Johnson said today in a new statement: 

“When economists and policymakers talk about the Basel proposal’s average impact on the cost of credit, a lot can get lost in the averages. Estimates about the average increase to the cost of credit hide important variance across commercial borrowers and retail borrowers. Within the retail sector, the averages may hide variance that is spread across a wide range of products, from credit cards, to small business loans, to mortgages.

“But most importantly, focusing too much on averages runs the risk of losing sight of the important variance experienced by consumers on the margins of our financial system. When banks are forced to pull back on revolving credit card loans, high loan-to-value mortgage lending, or small business loans, particular consumer populations will feel the impacts first and worst. 

“Given these risks, policymakers must slow down and give stakeholders enough information to understand how these enormous changes will impact these consumers.”

Key Findings

  • The Proposal may have lifelong negative impacts on consumer financial health. The Proposal includes a number of regulatory changes that would make it more expensive for banks to lend to retail consumers. Because the Proposal would only apply to banking organizations, it would advantage non-bank lenders that are not subject to the same stringent capital standards. That, in turn, increases the risk of consumer exposure to non-bank products that often have fewer consumer protections, less federal oversight, and much less ability to grow consumers’ credit histories than bank products. 
     
  • The Proposal’s impacts will be disproportionately borne by low-and moderate-income consumers, disabled consumers, and Black and Hispanic consumers. For instance, the Proposal includes a number of regulatory changes making it more difficult for banks to extend credit cards to consumers, particularly consumers that carry debt month-to-month. Recent research by the Federal Reserve Bank of Boston shows that access to credit cards is a key factor for college students’ ability to stay in school; but the impact is limited to students that work part-time to pay for tuition or rely on need-based financial aid. Similarly, the Federal Reserve Board found that Black credit cardholders reported carrying a balance on their credit cards at nearly twice the rate of White credit cardholders. The same Federal Reserve Board study found that 57 percent of disabled cardholders reported carrying a balance, as opposed to 46 percent of non-disabled cardholders. 
     
  • The Proposal’s disproportionate impacts could widen and harden important gaps in our financial system. By making it comparatively cheaper for consumers to obtain credit with non-bank financial institutions, rather than with banks, the Proposal potentially creates longer-term impacts that are net harmful to consumers’ long-term financial health. 

    The Consumer Financial Protection Bureau (CFPB) has found that 45 percent of consumers in low-income neighborhoods lacked credit scores, compared to just nine percent in upper-income neighborhoods. The CFPB explained that its “analysis suggests that these differences across racial and ethnic groups materialize early in the adult lives of these consumers and persist thereafter.” 

    Already, the Federal Reserve Board has found that Black and Latino consumers are already three times more likely than White consumers to use nonbank payday, pawn, auto title, and refund anticipation loans. The ratios were even more pronounced when comparing disabled to non-disabled respondents (10 percent vs. three percent). The Proposal will deepen these differences, increasing consumer use of non-bank financial products by consumers, and damaging their ability to develop and grow their credit scores.
     

  • By impacting consumer financial health, the Proposal could reinforce stubbornly pervasive headwinds in consumers’ broader lives. As recent expert Congressional testimony illustrates, impacting consumer credit visibility and credit scores can even have detrimental impacts to consumers’ lives outside of banking, like renting a home, getting a job, or in some cases, receiving medical services. 

A full copy of the White Paper is available HERE.

About the White Paper

The CBA’s White Paper starts with the basics, explaining what “capital” is and how capital regulation operates. The White Paper then goes on to explain how the Proposal would impact retail banking and, ultimately, the American consumer. The White Paper puts the pieces together, with a case study illustrating the Proposal’s cumulative impacts on one consumer’s personal version of pursuing the American dream, and her long-term financial health. Finally, the White Paper closes with a few suggestions for policymakers that aim to mitigate these impacts to consumers. Ultimately, however, the evidence (or in many cases, the lack of evidence) points to an urgent call for regulators to withdraw the Proposal; study its impacts on consumers, particularly those on the margins of our financial system; and then resubmit any modified version of the Proposal with that supporting data.