Casten Leads 106 Democrats In Letter Urging Banking Regulators to Revise Basel III Provisions That Could Imperil Clean Energy Transition And Undermine The IRA
Washington, D.C. — Today, U.S. Congressman Sean Casten (IL-06) led 106 colleagues in a letter to Federal Reserve Chairman Jerome Powell, FDIC Chairman Martin Gruenberg, and Acting Comptroller of the Currency Michael Hsu urging the agencies to revise tax equity provisions in the Basel III endgame proposed rules that may imperil the clean energy transition and undermine the implementation of the Inflation Reduction Act.
“We strongly support the Agencies’ goals of prioritizing the safety and soundness of our banking system and ensuring large banks are well-capitalized,” the lawmakers wrote. “However, we are concerned that substantially increasing the capital requirements for banks making tax equity investments, primarily in clean energy projects, is not reflective of such investments’ risk profiles and would have unintended consequences that endanger the clean energy transition. We therefore urge the Agencies to reconsider this change in the proposed rule and consider alternatives that accurately reflect the risk profiles of tax equity investments.”
“A provision in the proposed Basel III regulations could inadvertently throw cold water on billions of dollars of solar and storage investments, and we greatly appreciate Congressman Casten’s work to quickly fix this mistake,” said Abigail Ross Hopper, president and CEO of the Solar Energy Industries Association (SEIA). “Rapidly deploying clean energy is critical if we want to address the climate crisis. The Congressman’s proposal is a common-sense effort to correct a clear error in the draft regulations and preserve the growing clean energy economy.”
“Tax equity is a predominant source of financing in the U.S. renewable energy market, and it is critical that federal agencies immediately clarify a risk weight for renewable energy tax equity reflective of these investments' loan-like characteristics, low-risk profile, and overwhelmingly positive historical returns. Near-term action is essential to avoid stifling crucial financing for the renewable sector at a time when it is needed most,” said Lesley Hunter, Senior Vice President of Programs and Sustainable Finance, American Council on Renewable Energy (ACORE).
On July 27, 2023, the Agencies issued a notice of proposed rulemaking implementing Basel III, global standards agreed to by the Basel Committee on Banking Supervision in response to the 2007-2008 financial crisis. The goal of these standards is to improve the resilience of the U.S. banking system by modifying capital requirements for large banking organizations to better reflect their risks and apply more transparent and consistent requirements across large banking organizations.
However, a change to risk weighting for tax equity investments within the proposed rules could have unintended consequences for the financing of clean energy projects in the United States and undermine the goals of the Inflation Reduction Act.
Under existing regulatory capital rules, tax equity receives a 100% risk weight if the bank’s total equity investments are below 10% of its capital, but anything above that would be assessed at 400% risk weight. The proposed rules under Basel III would remove the 10% threshold test for equity investments and would provide the 100% risk weight only for community development investments such as low-income housing tax credit (LIHTC) investments. As a result, banks would have to hold $4 in reserves for every dollar of tax equity for clean energy projects that they provide, instead of $1.
The full text of the letter can be found here and below.
Dear Chairman Powell, Chairman Gruenberg, and Acting Comptroller Hsu:
We write regarding the proposed rules implementing Basel III endgame issued jointly by the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation (collectively, “the Agencies”) on July 27, 2023. We strongly support the Agencies’ goals of prioritizing the safety and soundness of our banking system and ensuring large banks are well-capitalized. However, we are concerned that substantially increasing the capital requirements for banks making tax equity investments, primarily in clean energy projects, is not reflective of such investments’ risk profiles and would have unintended consequences that endanger the clean energy transition. We therefore urge the Agencies to reconsider this change in the proposed rule and consider alternatives that accurately reflect the risk profiles of tax equity investments.
We appreciate the Agencies’ focus on safeguarding the strength and resilience of the banking system and were pleased to see an extension of the comment period to allow interested parties more time to analyze the issues and prepare their comments. We further support the Agencies’ attention to ensuring our financial system can adequately withstand challenges and continue to lend through periods of economic stress.
However, we are concerned with the proposed changes to risk weighting for non-publicly traded equity within the proposed rules. Currently, certain equity exposures carry a 100% risk weighting unless in aggregate they exceed more than 10% of a bank’s capital, at which point the marginal equity exposures carry a 400% risk weighting, also known as the 10% non-significant equity threshold test. The test includes all public and non-public equity exposures except certain qualified community development investments, such as low-income housing tax credit investments, which carry a 100% risk weight regardless of the threshold test.
While the proposed rules maintain the 100% risk weighting for community development investments, they would remove the non-significant equity threshold test. As a result, it would quadruple the capital requirements for all non-community development tax equity investments regardless of the level of exposure relative to the bank’s capital. This effectively increases the risk weighting for clean energy tax equity, from 100% risk weighting to 400% risk weighting. The proposed rule would apply the same risk weighting to tax equity as it would for private equity despite the former being less risky.
Clean energy tax equity investments have a similar risk profile to community development investments and, like community development investments, receive comparable support from the federal government. Tax equity has loan-like characteristics that allow project sponsors and banks to take advantage of federal tax incentives for clean energy projects. Therefore, we believe that they should have proportional risk weightings to other tax credit investments that qualify as community development investments.
The Inflation Reduction Act (IRA) is predominantly a tax incentive bill that extended and expanded federal tax incentives to decarbonize the U.S. economy, including technology such as clean energy manufacturing. And while the IRA facilitated new tax credit monetization options through transferable tax credits and direct pay for eligible taxpayers, there remains a critical role for tax equity to finance projects that typically have high up-front capital costs. Energy finance experts believe that the current $20 billion annual market for tax equity must increase to more than $50 billion to meet the goals of the IRA and fulfill the demand created by the new incentives.
As written, the proposed rule would make it prohibitively expensive for banks to extend tax equity financing for clean energy project development, which would slow deployment of clean energy generation and manufacturing. Leading tax equity providers anticipate that annual tax equity investments in the clean energy sector could shrink by up to 90%, and many banks could exit the renewable tax equity market entirely. More urgently, we are aware of this draft rule already causing tax equity providers to pause new clean energy investments pending the outcome of the regulatory rule making.
Given this, we urge the Agencies to carefully review the changes to capital requirements for noncommunity development tax equity investments in the proposal and consider alternatives that more accurately reflect the risk profiles of these investments. Additionally, we urge the Agencies to acknowledge the current chilling effect that this proposal is having on tax equity financing and consider solutions to ensure that the investments in clean energy projects and the projects themselves continue to move forward, while the rulemaking continues to play out.
We appreciate your attention to this important matter and look forward to your response. Please do not hesitate to contact my office with any questions.
Sincerely,
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