The 2008 global financial crisis severely rocked the domestic and international financial markets. In response, policymakers passed a wave of new laws and regulations intended to prevent similar future events. As is often the case, however, many policy responses have created unintended consequences and harmed American consumers rather than protect them. The implementation of the Basel III Endgame (B3E) is one banking regulation that could adversely affect energy consumers, including publicly-owned utility customers.

Developed by the Basel Committee on Banking Supervision (BCBS) – B3E is a series of robust policy reforms aimed at bolstering the resilience of the global banking system by requiring banks to maintain sufficient capital reserves. Ostensibly, this would ensure banks maintain operations during periods of financial instability. The core focus of B3E is the establishment of stricter capital adequacy ratios- the amount of money a bank must have on hand relative to its risk-weighted assets. The greater the amount of risk, the greater the amount of capital the bank must have to protect its depositors. 

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Since its development by BCBS, countries around the world are now working to implement B3E. In the U.S., the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency have promulgated several new regulations. The proposed rules focus on the amount of capital that large banks must reserve against their credit, operational, and market risk, so the framework of risk-weighted asset calculations only applies to banks with assets of $100 billion or greater, as well as their subsidiaries.

So, why does this matter to Americans, who don’t work on Wall Street? If our government does enact a regulation, policies that prevent another financial crisis would be good, right? B3E’s framework is a solution in search of a problem. The big banks recognize their responsibility to manage their risk, and they do so on their own. If proposed regulations mandate how big banks manage risk, their ability to conduct certain transactions could impact the prices paid for commodities, like energy, which could increase the cost of natural gas public utilities provide their consumers. 

For instance, B3E’s robust framework requires revised management of market risk. This refers to the risk of losses due to changes in market prices. Accordingly, BCBS proposed a standardized approach for complex market risk, allowing the continued use of approved internal market risk models. However, these new policies do not permit market risk to be calculated on the aggregate level but instead individually. This will likely have a significant impact on banks with sizeable trading operations, potentially requiring them to hold more capital. Accordingly, in the U.S., these specific implementing regulations would apply to banks with over $5 billion in trading assets and liabilities, or where these assets exceed 10% of the bank’s total assets.

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These newly proposed capital requirements for banks with trading operations would specifically present potential negative impacts on energy costs, as they are expected to result in increased costs for hedging transactions financed by such banks. For instance, American Public Gas Association (APGA) members serve customers in more than 730 communities across the U.S. In efforts to keep customer bills affordable, these publicly-owned utilities use financial instruments to help hedge natural gas prices. If costs for banks increase under B3E, these utilities, and ultimately their customers, will likely be negatively impacted by higher natural gas supply costs. There is also concern that higher costs to engage in hedging for small- and medium-sized utilities will drive them to abandon the practice altogether, resulting in greater exposure to extreme price fluctuations in the natural gas commodity market. 

If enacted, the U.S. regulations implementing B3E would allow banks a transition period of three years, starting on July 1, 2025 and full compliance required on July 1, 2028. While the intentions of B3E to strengthen and provide greater transparency to the global banking system are good, publicly-owned gas systems are concerned that the implementation of these banking regulations will be unduly onerous. This could result in higher costs for consumers, as well as create significant barriers for APGA members to manage risk by engaging in hedging. APGA encourages regulators to revise their proposed rules to account for the negative impact they may have on energy costs that American consumers must pay.

Stuart Saulters is the Vice President of Government Relations for the American Public Gas Association (APGA). APGA represents more than 730 communities across the U.S. that own and operate their retail natural gas distribution entities. These include not-for-profit gas distribution systems owned by municipalities and other local government entities, all accountable to the citizens they serve.  

The views and opinions expressed are those of the author’s and do not necessarily reflect the official policy or position of C3.