NGFA urges federal agencies to reconsider bank capital proposals

In comments submitted on Dec. 11 to federal banking agencies, NGFA and eight other agricultural groups said recent proposals to overhaul bank capital rules would have unintended consequences for the U.S. derivatives markets and make hedging more expensive for all market participants.

“We are very concerned that any contraction in the availability of clearing services will have a disproportionate impact on agricultural end-users that are far outside the major financial centers, especially smaller entities such as grain elevators and family farms,” the comments stated. “We urge you to modify the proposals so that they do not disincentivize banks from providing this important service to their customers.”

In July 2023, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency launched a proposal to increase capital requirements for banking organizations with total assets of $100 billion or more by replacing the current capital framework with what is known as Basel III endgame reforms. The Federal Reserve Board also issued a proposal to revise the surcharge calculation for U.S. global systemically important banks (GSIBs). The pair of proposals would have a “significant impact on the availability of clearing services,” NGFA noted. 

Although the proposals would apply directly to large banking organizations, the rules would have far broader indirect impacts on customers and financial markets. Importantly, the strength of central clearing depends on the participation of banks and other institutions as members of clearinghouses, noted NGFA and the other groups. The proposal could reduce the already low number of firms available to provide clearing services to agricultural end-users. 

“This is an expensive business, and we are concerned that two recent capital proposals will make it even more expensive,” they said. “For agricultural end-users, hedging is like insurance…But not at any price. If the cost of using cleared derivatives rises too high, they will switch to using uncleared derivatives, or simply abandon hedging.”

Both the capital proposal and the GSIB surcharge proposal are open for public comment until Jan. 16, 2024.