Mothballing the Basel III Endgame | The Future of US Bank Regulation with Jason Cave

Episode Summary

Executive Summary: Jason Cabe argued the incoming U.S. regulatory regime will be broadly friendlier to banks, especially community and regional lenders, through lighter Basel III implementation, faster M&A approvals, and a more pragmatic approach to FDIC, FHFA, and supervisory policy. He stressed that post-crisis rules improved safety but also pushed risk into nonbanks and created unintended burdens that regulators now need to correct.

Main Topics: Regulatory shift under the new administration (Priority: 5/5): Cabe expects significant personnel and policy changes across bank regulators, with the biggest benefit likely accruing to community and regional banks through a less burdensome supervisory tone. Basel III endgame and capital calibration (Priority: 5/5): He sees Basel III endgame as weakened or likely scaled back, arguing the original post-crisis reforms raised capital quality and reduced systemic risk but later drafts drifted toward overreach and competitive distortions. SVB, interest-rate risk, and supervisory failure (Priority: 5/5): Cabe said Silicon Valley Bank was fundamentally an interest-rate risk and supervisory issue, not a Basel capital problem, and regulators should have acted earlier and more surgically. Brokered deposits, uninsured deposits, and deposit insurance (Priority: 4/5): He argued the FDIC’s brokered-deposit expansion is outdated and misses the real issue: uninsured deposit behavior, which should be studied in greater detail and possibly paired with adjusted insurance limits or private-market tools. M&A policy and regional bank consolidation (Priority: 4/5): He expects a more permissive merger environment and says the FDIC, more than the Fed, is often the bottleneck. He believes regional-bank consolidation can strengthen local banking ecosystems. FHFA, Fannie/Freddie exit, and FHLB oversight (Priority: 3/5): Cabe expects the FHFA to refocus on GSE exit strategy while the FHLB reform debate may recede. He emphasized the systemic importance of the housing finance architecture and the need for a credible Treasury backstop. Nonbanks, private credit, and FSOC oversight (Priority: 4/5): He noted that much credit risk has migrated to private markets, where prudential oversight is fragmented or absent, making FSOC important for identifying systemic vulnerabilities and understanding funding/liability-side risk.

Key Arguments: Post-crisis capital reforms improved bank resilience, but some later regulatory moves were overbuilt and pushed activity into less regulated nonbanks. Basel III’s main purpose was to impose a meaningful risk-weight floor on European banks’ internal models, not to crush U.S. community banks. SVB should have been handled through targeted supervisory intervention on unrealized losses and interest-rate risk, rather than broad new rules. The real SVB issue was uninsured deposits and run dynamics, not brokered deposits per se. FDIC brokered-deposit rules are outdated because modern fintech channels and intermediary relationships do not fit a 30-year-old framework. Deposit insurance limits should be reviewed for inflation and market structure, but private solutions like reciprocal deposits also matter. More bank M&A, especially among small and regional banks, would help viability and preserve local lending capacity. FHFA’s most important future task is likely GSE exit strategy, but any reprivatization requires a clear, explicit market backstop. FSOC should focus on liabilities, liquidity exits, and systemic funding behavior in private credit and nonbank finance rather than merely re-labeling risk. Private equity and private credit are not unregulated in every sense, but prudential oversight of their systemic role remains limited and fragmented.

Data Points: Basel III risk-weight floor: 72.5% - Cabes described this as the compromise floor agreed in Basel to constrain internal models, versus the U.S. Collins Amendment floor of 100%. U.S. mortgage risk-weight floor under standardized rules: 50% - He used this as a simplified example of the U.S. standardized approach for mortgages. Collins Amendment floor: 100% - He said the U.S. effectively prohibits large banks from using internal models to go below the standardized floor. FDIC deposit insurance limit: $250,000 - Current standard insurance coverage per depositor, per insured bank. Deposit insurance limit increase year: 2010 - The cap was raised from $100,000 to $250,000 during the financial crisis. Historical deposit insurance cap: $100,000 - Prior FDIC insurance limit before the 2010 increase. U.S. banking-system deposits: about $7-8 trillion to $17-18 trillion - He cited the growth in total bank deposits to argue limits may merit review. SVB uninsured deposits: $151 billion of $173 billion - The transcript cites SVB as having roughly 87% uninsured deposits before failure. SVB uninsured deposit ratio: 87% - Calculated from the cited deposit figures for Silicon Valley Bank. SVB outflow in one day: $40 billion - Cabe cited rapid withdrawal behavior that signaled a severe run. Potential next-day SVB outflow if open: $100 billion - He said that if SVB had stayed open, another extremely large outflow could have occurred. WAMU comparison: about $15 billion over a few days - Used as a contrast to emphasize how extreme SVB’s run was. Fannie/Freddie retained net worth: upwards of $150 billion - He said the GSEs have built significant retained value, which affects exit strategy discussions. Fannie/Freddie guarantee book: about $9-10 trillion - He cited the size of the mortgage ecosystem and MBS market tied to the GSEs. FHFA/FDIC insurance cap context: 2-quarter? no; 30 years - He said brokered-deposit rules have existed for over 30 years. Regional bank application timing: 6 months to 1 year; sometimes 2 years - He argued M&A approvals can take far too long, especially at the FDIC. FDIC hiring/structural references: 5-member board - He described the FDIC’s board structure and succession rules. FDIC staff issue count example: 600 MRA vs 4 critical items - He criticized regulatory over-issuance of matters requiring attention rather than focusing on a few urgent problems.

Pivotal Quotes: "The issue with SVB was uninsured deposits. And yet nobody's done anything on that." — Jason Cabe: He was arguing that policymakers responded to the wrong problem after SVB’s failure. "If they are saying, we don't need to do it, we already got it, we probably needed to do it because they found a way around it." — Jason Cabe: He was explaining why Basel leverage and risk-weight reforms were necessary to prevent regulatory arbitrage. "That really would have hurt the smaller region and the smaller and regional banks." — Jason Cabe: He was criticizing the brokered-deposit expansion and its likely effect on community and regional lenders.

Implications: Expect a friendlier bank-regulatory climate, faster deal approvals, and possible Basel retrenchment, but also renewed scrutiny of uninsured deposits, nonbank migration, and the credibility of housing-finance and liquidity backstops.