These regulators issued the final  regulations to implement the Basel III-based capital standards in the  United States. U.S. Basel III Capital Requirements May Have a Limited Effect on Capital in the Short Term but Are Expected to Increase Compliance Costs

The vast majority of banks and bank holding companies already would  likely be able to meet the new minimum capital requirements and capital  conservation buffer at the fully phased-in levels required by 2019. We  estimated that as of first quarter 2014 more than 90 percent of bank  holding companies currently meet the new requirements and that those  with insufficient capital would need to raise about $4 billion to 5 billion in  capital to cover the capital shortfall and meet the requirements. Some Market Participants Generally Expect U.S. Capital Requirements to Increase Compliance Costs but Have a Limited Effect on the Cost and Availability of Credit

Although their views are not indicative of the banking industry as a whole,  bank officials we interviewed generally expected that they would be able  to meet new capital requirements, their compliance costs would increase,  and effects of the requirements on credit would not be large. According to  officials from all eight community banks we interviewed, they did not  anticipate any difficulties in meeting the U.S. Basel III capital  requirements but expect to incur additional compliance costs. Specifically, officials from two community  banks said that they expected the capital regulations to improve the  safety and soundness of the banking system, but three community banks  questioned the appropriateness of the regulations for small banks. At the same time,  there are limitations to full harmonization. As was the case with the  implementation of Basel II, some market participants or observers have  raised concerns about regulatory differences in the implementation of  Basel III between jurisdictions and their possible competitive effects. In  addition to the risk-based capital standards, the Basel Committee  monitors implementation of the additional loss absorbency requirements  for G-SIBs and domestic systemically important banks, liquidity coverage   Basel Committee members generally reported  ratio, and leverage ratio.that they have not yet adopted regulations to implement these  requirements. The Basel Committee’s assessments of Basel III implementation found  that the jurisdictions reviewed to date have adopted rules generally  consistent with the Basel III standards but identified some inconsistencies  in regulator-approved bank models across countries. According to the  Basel Committee, public confidence in prudential ratios, resiliency of  banks, and a level regulatory playing field for internationally active banks  cannot be achieved without consistency in the adoption and  implementation of the Basel standards. Foreign banking organizations. The  Basel capital standards have no legal force; rather, the Basel Committee  members developed and agreed to the standards, with the expectation  that each member will implement them. This enhanced ratio  raised the standards above the Basel III minimum standards. Basel Committee and other studies  indicated that U.S. banks tended to be subject to higher risk weights than  EU banks, in part due to their use of the Basel I and Basel II frameworks,  respectively. While differences exist in the implementation of Basel III between  jurisdictions, the extent to which these differences collectively will affect  competition among internationally active banks is unclear. In addition to regulatory  capital requirements, other factors can affect the competitive position of  internationally active banks, such as differences in accounting treatment,  cost of capital, tax rules, and other regulations from one country to  another. Agency Comments

We provided a draft of this report to FDIC, Federal Reserve, and OCC for  their review and comment. Appendix I: Objectives, Scope, and Methodology

This report examines how (1) U.S. Basel III capital may affect U.S.  banking organizations, including smaller banking organizations, and (2)  implementation of Basel III’s capital and other standards by different  jurisdictions may affect the ability of U.S. banking organizations to  compete internationally. To determine the extent to which jurisdictional differences in  implementation of Basel III’s standards may affect how various U.S.  banking organizations compete, we judgmentally selected and  interviewed 10 global systemically important banks (G-SIBs) operating in  the United States, European Union, and Japan to obtain their views on  the competitive differences resulting from implementation of the Basel III  framework across jurisdictions. Appendix II: GAO Analyses of Basel III Minimum Capital Ratios, Capital Shortfall, and Funding Costs

To assess how the U.S. Basel III capital regulation may impact U.S.  banking organizations, including smaller organizations, we used data  from the Consolidated Financial Statements for Holding Companies— Form FR Y-9C (Y-9Cs) and from the Consolidated Reports of Condition  and Income (Call Reports) as of March 31, 2014, to estimate (1) the  number of bank holding companies and depository institutions with capital  ratios that are greater than or equal to Basel III minimum capital ratios; (2)  the amount of capital bank holding companies and depository institutions  would need to take actions to meet the U.S. Basel III minimum capital  requirements; and (3) the change in funding costs for bank holding  companies and depository institutions associated with the amount of  capital they would need to meet the minimum capital standards.
Why GAO Did This Study

The 2007-2009 financial crisis revealed that many U.S. and international banks lacked capital of sufficient quality and quantity to absorb substantial losses. In 2010, the Basel Committee (the global standard-setter for prudential bank regulation) issued the Basel III framework—comprehensive reforms to strengthen global capital and liquidity standards with the goal of promoting a more resilient banking sector. In 2013, federal banking regulators adopted regulations to implement the Basel III-based capital standards in the United States, which generally apply to U.S. bank holding companies and banks and are being phased in through 2019. Some market participants have raised questions about the potential negative impact of the regulations on U.S. banks, including on their lending and competitiveness.
This report examines how (1) the U.S. Basel III regulations may affect U.S. banks, including smaller ones, and (2) implementation of Basel III by different countries and other jurisdictions may affect U.S. banking organizations' international competitiveness. To address the objectives, GAO analyzed data from financial filings; conducted legal and economic analysis; reviewed empirical studies, federal regulations, and agency documents; and interviewed regulators, U.S. and foreign banks, and industry associations.
GAO makes no recommendations in this report. GAO provided a draft of this report to the banking regulators for their review and comment and received technical comments, which were incorporated as appropriate.

What GAO Found

Although the U.S. Basel III capital requirements may increase compliance costs, they likely will have a modest impact on lending activity as most banks may not need to raise additional capital to meet the minimum requirements. GAO's analyses of financial data for the first quarter of 2014 indicate the vast majority of bank holding companies and banks currently meet the new minimum capital ratios and capital conservation buffer (an additional capital requirement) at the fully phased-in levels required by 2019. GAO estimated that less than 10 percent of the bank holding companies collectively would need to raise less than $5 billion in total additional capital to cover the capital shortfall. Banks with a shortfall tended to be small, with less than $1 billion in assets. The empirical research GAO reviewed suggests that higher regulatory capital requirements will have a modest effect on the cost and availability of credit. Similarly, GAO's economic analysis indicates that raising the additional capital would lead to a modest decline in lending and a modest increase in loan rates. According to officials from the eight community banks GAO interviewed, they do not anticipate any difficulties meeting the capital requirements but expect to incur additional compliance costs. Officials from the 10 global systemically important banks that GAO interviewed said they have been incurring significant costs to comply with the new requirements, but three said that U.S. minimum capital ratios for Basel III tend not to be the binding capital constraint. Most of these bank officials said they expect the requirements to improve the resilience of the banking system.
Jurisdictional differences in the implementation of the Basel III capital standards have arisen, but their competitive effect on internationally active banks is unclear. Basel III serves, in part, to limit competitive disparities due to differences in capital standards, but there are limitations to full harmonization. For example, the Basel capital standards have no legal force; rather, members of the Basel Committee on Banking Supervision (Basel Committee) developed and agreed to the standards, with the expectation that each member will implement them. Thus, jurisdictions may adopt requirements more or less stringent than the minimum standards. Almost all Basel Committee members report having adopted rules to implement the Basel III capital requirements. To help promote a level regulatory playing field, the Basel Committee began conducting reviews in 2012 to assess whether each member's implementation meets the Basel III minimum standards and whether implementation produced consistent outcomes across jurisdictions. These reviews found the rules of the seven members it assessed to date to be generally compliant. However, the Basel Committee's other reviews identified some inconsistencies in how banks across different jurisdictions calculated their risk-weighted assets. As was the case with Basel II implementation, some banks and others are concerned about jurisdictional differences in the implementation of Basel III and their effect on competition. For example, some jurisdictions are subjecting certain of their banks to capital or leverage requirements above the Basel III minimums or exempting banks from certain capital requirements. Because Basel III's implementation is ongoing, the extent to which the differences collectively will affect competition among internationally active banks is unclear. In addition, other factors can affect the competitive position of internationally active banks, such as differences in accounting treatment, cost of capital, and tax rules across jurisdictions.