By Faridat Salifu
The implementation of the Basel 3 Endgame in the United States has recently sparked
concerns among Wall Street's major banks, signaling a potential upheaval in the current
landscape of green finance.
The proposed regulations, conceptualized after the 2008 financial crisis, are anticipated
to necessitate higher capital reserves for banks, thereby increasing the cost of providing
finance.
Proposed by a consortium of US authorities, including the Federal Reserve, the Basel 3
rules have been perceived as a transformative force influencing how banks in the
world's largest economy engage with risk, as noted by EY.
JPMorgan Chase & Co and Goldman Sachs Group Inc, two prominent institutions, have
voiced their apprehensions about the impending capital requirements.
JPMorgan's chief operating officer, Daniel Pinto, expressed concerns about facing a
25% capital increase, which is expected to impact the bank's ability to allocate funds to
green initiatives. Similarly, Goldman Sachs' CEO, David Solomon, foresees a
"quadrupling" of capital requirements for certain clean-energy projects, signaling the
potential ramifications for climate financing models.
John Greenwood, co-head of Americas structured finance at Goldman, highlighted the
need for a reassessment of existing climate financing structures amidst the impending
changes. He emphasized the potential impact on blended finance models, which
leverage public sector support to attract private investment, as they will need to factor in
the additional capital costs for banks.
The shift in capital dynamics is expected to prompt banks to seek collaboration with
other sectors of private finance that may not be subject to similar regulations, according
to Greenwood. There is growing acknowledgment of the necessity to attract institutional
investors to support new investments in energy and infrastructure, given the constraints
faced by commercial banks under Basel.
The financial industry's response underscores the delicate balance between the safety
and soundness of the banking system and the goals of climate policy, as noted by Jeff
Berman, New York-based partner and US financial services regulatory group lead at
law firm Clifford Chance. The sentiment from the banking sector emphasizes the
increased difficulty in achieving commercial returns once capital requirements are
elevated.
Consequently, there are apprehensions about potential capital migration from banks to
the less-regulated arena of shadow banking, where risk levels are perceived to be less
monitored. This shift is posing concerns about the potential buildup of risks leading to
financial shocks, as highlighted by JPMorgan CEO Jamie Dimon and Goldman's
Solomon.