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New Fed 'Basel' rule could wipe out Montana's small business, ranches and farmers – Daily Montanan [1]

['More From Author', 'October', 'Jim Smith']

Date: 2023-10-31  

Montana is a small business state. Whether it’s family farms and ranches, restaurants, bars, breweries, gift shops, retail establishments or service industry firms like accounting, legal, or medical offices, the lifeblood of this state is small business. So it is quite concerning to read about rules proposed by the Federal Reserve that will have the effect of reducing and limiting capital and financing available to these small businesses.

I’m referring specifically to the Federal Reserve’s so-called “Basel Endgame.”

While this package of rules aims to bolster financial stability in the economy by significantly increasing capital requirements for large U.S. banks, the consequences could be dire for farmers and ranchers, and others in Montana’s heartland. The “Basel” refers to Basel, Switzerland, which is where this proposal originated.

The basic proposal is this: The Fed is proposing that banks be required to hold as much as 20% more capital (cash) than they are presently required to hold.

If the impact of the Federal Reserve’s proposal was neutral, or limited to requiring banks k6to hold more money, I would not be raising alarms. My issue is the rule’s downstream effects.

Any rule that requires banks to hold more capital will reduce credit available for lending. If the Federal Reserve moves forward, small businesses will pay higher rates for credit and find fewer opportunities to borrow. First-time homebuyers will find it more difficult to obtain a mortgage, and Montana farmers and ranchers will pay higher costs for credit. Access to affordable credit is vital for farmers and ranchers. Many use loans to buy seed, cover operational expenses, purchase equipment, and acquire land.

Unfortunately, the Federal Reserve’s proposal would leave most of our small farms and ranches struggling to access and afford the credit available to them today. Other small businesses need credit in order to expand, diversify or sometimes just to make it through the long Montana winters.

Beyond higher credit costs, there’s another issue with the Federal Reserve’s proposal. This issue gets deep into the weeds of how some agriculture producers hedge their risks by trading futures in the commodities markets. The practice can help a wheat farmer or cattle rancher create some certainty in an industry where nothing else is certain.

The Federal Reserve proposal would force banks to change how they value these trades. Experts, including some members of Congress, believe the proposal would “penalize” a practice “that the farming industry relies on to hedge their risks.” Curiously, the Federal Reserve has carved out farmers and ranchers from similar rules in the past. Now, it is moving forward without any exemptions.

The problem is the unintended consequences of this proposal. It’s aimed at big banks but would hit Montana farmers and ranchers, small businesses and consumers.

Sens. Jon Tester and Senator Steve Daines ought to invite the seven members of the Fed’s Board of Governors to come to our state, see things as they are on the ground, talk to producers, business people and bankers about the impact this proposed rule will have in Montana.

That might induce them to reconsider it.

It is important that the full board of governors reconsider the impact of this rule on farmers and ranchers. Many are already struggling under increased costs for fuel, electricity, seeds, feed and labor. While the Federal Reserve gets some credit for fighting inflation without putting the economy into a recession, all that work could be undone by a rule that could put credit out-of-reach for many small businesses, including the 21,000 farms and ranches here in Montana.

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[1] Url: https://dailymontanan.com/2023/10/31/new-fed-basel-rule-could-wipe-out-montanas-small-business-ranches-and-farmers/

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