Basel III could exacerbate challenges facing equipment lenders

Basel III compliance could compound challenges facing the equipment finance industry as banks become increasingly conservative while grappling with declining deposits. 

Basel III, international rules that require banks to have enough capital and liquidity to absorb unexpected losses, is set to take effect in July. The Basel Committee on Banking Supervision, an international organization that develops banking regulations, created the rules in response to the global financial crisis of 2008. 

The rules come when banks are already struggling to obtain adequate capital, with domestic deposits decreasing $1.1 trillion, or 5.3%, from the first quarter of 2022 through the third quarter of 2023, according to the FDIC. 

Domestic bank deposits fell $197.7 billion, 1.1%, from the first quarter to the second quarter of last year, according to the FDIC. While the FDIC projects deposit activity to grow modestly in 2025, Basel III compliance would require a considerable increase in capital, Eryn Brasovan, partner at national law firm Womble Bond Dickinson, told Equipment Finance News. The firm’s specializations include equipment finance and government regulation. 

“For the globally systemic banks, their capital requirements would go up just over 20%,” she said. “So, it’s not an insignificant amount more that they would have to dedicate to holding this capital in the event of a stress financial situation.” 

Lenders are preparing to alter their financing strategies in response to Basel III, Jeff Elliott, founder and chief executive at Elevex Capital and former president of Huntington Equipment Finance, said during the Equipment Leasing and Finance Association convention in October. 

“When you have capital changes, you have to adjust your business tremendously as a bank,” he said. “And so, what we finally end up with is, we will change the way we originate. … Focusing more on primary bank customers and deposits is what you’re going to see going forward with Basel III.” 

It is imperative for equipment lenders to maintain “extremely liquid assets” to meet Basel III requirements, Womble’s Brasovan said. Risk modeling can also help banks adhere to the rules. 

“It’s an investment, and that’s part of what is challenging for the banks because it’s driving up expenses,” she said. “But you can better determine where capital goes and have the most flexibility the more that you invest in modeling out the risks and are able to show regulators the reasoning behind where your capital is going.” 

Strain on lending environment 

While maintaining adequate capital is the key to Basel III compliance, it “limits [banks’] ability to lend money,” Womble Bond Dickinson Partner Shari Bacsardi told EFN.  

“So many of our clients [loaned] less in 2024 because of the absence of receipts on hand to do the funding to potential customers,” she said. “So, there’s the regulatory aspect, but it’s the practical impact on what that does to the marketplace, in that some of our clients are able to do more funding this year because of what they have on hand versus other folks.” 

Basel III may also hinder financing for small businesses with riskier credit profiles, already a challenge for many equipment finance borrowers, Sara Costanzo, partner at creditor rights law firm Weltman, Weinberg and Reis, told EFN. 

The rules could “cost lenders a lot more money to not only track and comply, but their ability to enter into some of the risk-credit space could be pulled back, and that would unfortunately put customers in a space where it’s harder for them to actually get loans, harder for them to qualify,” she said. 

Equipment financiers denied — or only partially approved — loans for 27% of small business applicants in 2023, according to a survey by the Federal Reserve comprising nearly 11,000 responses. 

Potential changes under Trump 

Basel III regulations could ease or get pushed back under President-elect Donald Trump, giving lenders more “breathing room,” Costanzo said, noting that Trump aides have suggested shrinking or eliminating federal banking regulatory agencies. 

However, it’s also possible that Basel III rules remain or marginally change because preparation for potential financial crises is a bipartisan issue, Ryan Thompson, of counsel at Womble Bond Dickinson, told EFN. 

“It’s sort of like anti-money laundering rules, where everybody thinks that they might be loosening and then they don’t because no one really wants that,” he said. “So, could the capital requirements become less? Possibly.” 

But Basel III isn’t “top of mind” for many legislators, which could delay any potential changes to the rule, he said. 

The third annual Equipment Finance Connect at the JW Marriott Nashville in Nashville, Tenn., on May 14-15, 2025, is the only event that brings together equipment dealers and lenders to share insights, attend discussions on crucial industry topics and network with peers. Learn more about the event and register here.