By Abigail Meirink
Higher capital requirements may reduce the role banks play in the climate transition movement.
The capital regulation plan known as Basel III Endgame is a critical topic that has dominated conversations among banks for months and continues to be a focal point into the new year. The proposal would bring significant changes to how U.S. banks price risk: Once finalized by the U.S. Federal Reserve, FDIC and OCC, we could see an average increase in capital requirements of about 16% for banks with assets totaling $100 billion or more on their balance sheets.
For context, JPMorgan estimates that under the proposed regulation, the bank will need to boost its capital by 25%, a change that would make borrowing more expensive across the board, from large multinational enterprises to individuals securing a mortgage. A particularly heavy burden, however, could fall upon tax equity investments, an important source of financing for many “green energy” projects. The risk weighting for tax equity investments is set to soar from 100% to 400%, effectively quadrupling the capital banks must retain to hold these investments.
Developers of clean energy and infrastructure projects often depend on tax equity investments (a $20 billion annual market) to finance the development of major infrastructure projects. By quadrupling the capital requirement for these investments, Basel III could eliminate an important financing option for clean energy developers, as it would become prohibitively expensive for the banks to provide. Developers of clean energy would be forced to find alternative and more costly forms of financing. Not only could this slow the global transition to clean energy, but it would also increase the cost of clean energy for consumers.
The threat of decreased climate-related funding has gained the attention of U.S. House and Senate Democrats, who have sided with banks in pushing back on the regulation. Additionally, several organizations such as the American Council on Renewable Energy and the Solar Energy Industries Association have voiced their concerns about the regulatory proposal and how it would affect the deployment of green energy generation and manufacturing. Both organizations noted in a letter to lawmakers that raising capital requirements for tax equity investments would force the largest banks “entirely” out of the renewable tax equity market.
The comment period for the Basel III proposal ended on January 16. Given the amount of resistance by banks, politicians and organizations, many analysts believe we could see major changes to the final rule.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.
© 2009-2024 Neuberger Berman Group LLC. All rights reserved.
Original Post
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Read the full article here