- With QT fading, regulators' capital and risk-weight rules now most influence not how much banks lend but where credit flows.
- The Basel III endgame would materially raise capital for banks above $100B and could skew lending away from hard-to-model productive investment and toward collateralized real estate and securities.
- The policy goal is to measure and steer loan-book composition toward production credit via disclosure, scorecards and recalibrated risk weights aligned with tax and accounting incentives.
- Key uncertainties include impacts on borrowing costs, stability and whether tighter rules shift credit away from smaller banks and underserved sectors.
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The primary article argues that with the end of quantitative tightening, regulators now hold the real lever over credit direction: not how much banks can lend, but to what purpose they direct credit. It identifies three types of credit: consumption credit, asset-market credit (real estate, financial assets), and production credit (capital formation). The article claims that too much credit in many developed economies has shifted into asset markets—causing overvalued real estate, stretched financial valuations, and falling productivity—even if total credit grows.
Key here is the interaction of bank regulation and the Basel III “endgame” proposal. The 2023 joint proposal by the FDIC, OCC, and Federal Reserve would, among other things, standardize and strengthen risk‐based capital requirements and expand the scope of capital buffers for banks with more than US$100 billion in assets. In some cases, risk weights on mortgages and other real estate-related loans are explicitly increased, which could reduce the relative attractiveness of asset-market lending.
However, the author cautions—and existing analysis confirms—that the Basel rules might still unintentionally favor asset-market credit. Many real estate exposures are easier to collateralize, value, and securitize, which tends to lower risk weights relative to more bespoke production credit (e.g., manufacturing, infrastructure). Tax incentives (like mortgage interest deductions and favorable capital gains treatment on real estate or securities) further tip the scale toward asset-market credit.
Empirical work, such as BIS Bulletin No. 91 (“Credit and Resource Allocation in EMEs”), shows that shifts in credit from production toward real estate correlate with slower productivity growth and greater output dispersion—findings that support the author’s policy concerns. Meanwhile, there has been substantial opposition to parts of the Basel III endgame from the banking industry over concerns it will raise capital too much and impair lending; regulators are reworking certain proposals, aiming to make them more industry-friendly by early 2026.
Strategically, banks should anticipate that regulators will demand greater transparency about the purpose and composition of their loan books. Firms that generate a higher share of production credit may gain regulatory favor or cost advantages, while those heavily weighted toward asset-market or consumption lending may encounter higher capital costs. Investors and analysts should monitor metrics beyond total credit growth—e.g., sectoral allocation, productivity trends, and risk-weighted capital ratios. Policymakers will need to reconcile regulatory tightening with concerns around competitiveness, financial stability, affordability of credit, and equitable access.
Supporting Notes
- The author describes three distinct types of credit: consumption credit (e.g. card balances, overdrafts), asset-market credit (e.g. real estate, securities), and production credit (e.g. plant, infrastructure), highlighting that “not all credit is created equal.”
- BIS Bulletin No. 91 finds that in emerging markets, credit growth has shifted from manufacturing to real estate, alongside declining productivity and greater dispersion in firm‐level output.
- The Basel III endgame proposal from July 27, 2023 would apply to banks with ≥ US$100 billion in assets, standardize risk-based measures across large banks, include unrealized gains and losses on certain securities in capital, and increase capital requirements by an estimated aggregate of ~16 percent for large firms.
- Critiques of the Basel proposal note that risk weights for residential real estate and retail exposures are being increased (e.g. an added 20-percentage-point surcharge for some mortgage exposures), while exemptions or reductions for productive sectors are less clear or absent.
- A recent FDIC proposal (June 27, 2025) aims to modify leverage‐capital standards (enhanced supplementary leverage ratio) to reduce disincentives for banks to engage in low‐risk activities like U.S. Treasury market intermediation, suggesting some regulatory pushback against rules that might misalign credit incentives.
- Regulators are currently reworking the Basel III endgame rules to be more industry‐friendly, with revised proposals expected by end of 2025 or early 2026.