Elizabeth Fairchild

Washington, D.C. – Three remarkable developments explain why President Biden’s “Build Back Better” agenda is working: (1) each dollar Washington invests is unlocking multiple private sector investment dollars; (2) those investment dollars are flowing to U.S. counties hit hardest by automation and globalization (a sharp reversal from recent years, where investment centered on a handful of tech hubs in California, New York, and Massachusetts); and (3) small businesses, particularly those owned by minorities and operating in low-to-moderate income (LMI) communities, are winning a larger share of these new investment dollars (a sharp reversal of post-financial crisis lending, where “never again” regulations pushed lenders to favor larger, more established borrowers).

It’s a remarkable accomplishment, earned, in part, through savvy bipartisan dealmaking and close coordination among the dozens of agencies and Departments rebuilding our semiconductor manufacturing capacity, providing broadband in remote, rural areas; constructing a clean energy infrastructure of wind turbines, solar installations, charging stations, and BEVs; and upgrading our airports, rail, and waterways. Thousands of federal, state, and local government officials are collaborating with investors, entrepreneurs, executives, and small business owners to reshore manufacturing, maintain America’s energy leadership, and help our hardest hit counties prosper.

But all that hard work and collaboration across the White House and Departments of Energy, Commerce, Labor, and Treasury (to name a few) could be wasted if the Federal Reserve (the Fed) fails to adjust its proposed its “Basel 3 Endgame” regulations, which could stifle the significantly higher value and slightly higher risk investing President Biden has worked hardest to encourage.

Rarely does a well-intentioned proposal from one office of the Federal government conflict with and threaten the proposals of dozens of other offices so clearly. Last July, the Fed (working with the OCC and FDIC) proposed to increase U.S. capital requirements, reasoning that doing so would align the U.S. banking system with international capital standards set by the Basel Committee in 2017. For America’s largest banks, it would significantly raise capital demands at the very time President Biden is counting on these same banks to fund a clean energy revolution, broadband buildouts to remote areas, and semiconductor supply chains – all while also expecting those banks to increase their investments in smaller, riskier firms serving LMI communities. 

It’s easy to see how this imminent collision of gradual, long-term capital market reforms and urgent, riskier-by-design Build Back Better investments happened. The Fed’s not responsible for getting capital in the hands of historically disadvantaged small business owners. That’s the Small Business Administration’s mission. Nor is it the Fed’s fault that America cannot complete our transition to BEVs unless we reopen mines across the U.S.; build battery fabrication plants and BEV charging stations from scratch; encourage investment in BEV innovation; and provide tax incentives to encourage car buyers to go electric – all at the same time.

Consider, for example, the Inflation Reduction Act’s use of tax equity in financing renewable energy projects – a key focus for the Biden Administration. Tax equity offers a form of project financing, using a combination of project-generated cash flow and federal tax benefits. Tax equity is responsible for roughly half of all renewable energy investments here in the U.S., and energy producers, utilities, investors, and entrepreneurs have announced more than $110 billion in new clean energy investments in response to the Inflation Reduction Act. These cover everything from wind and solar to fuel cells, biomass, and hydropower. 

Ignoring the bargain Biden has struck with renewable energy investors, manufacturers, producers, utilities, and future customers, the Fed proposes to increase the risk weights on renewable energy tax equity investments from 100% to 400%, which makes them prohibitively expensive. In doing so, the Fed applies a private equity weight to a demonstrably lower-risk clean energy investment. 

This shift would jeopardize $20 billion in planned renewable tax equity investments in 2024 alone. Beyond this, the proposal’s market risk provisions may further escalate costs for U.S. companies seeking to hedge business and operating risks. Addressing these issues is critical for any future financing in the renewable energy sector. 

The Fed’s proposed capital requirements could have a similar impact on affordable housing, another Build Back Better priority, while its definition of “market risk” could make it more expensive for municipalities to underwrite capital infrastructure projects like roads, bridges, hospitals, and schools.

So that’s the rub. The Fed does not seem to appreciate that the challenges Build Back Better addresses are “puzzle problems,” meaning that if you put 9 out of 10 pieces in the right place, at the right time, but misplace the 10th piece, you lose. President Biden is pushing to solve incredibly difficult problems, all while asking smaller, riskier businesses to lead the work. Each step the Fed takes to reduce the volume of bank lending will have a disproportionate impact on marginalized companies, the marginalized communities they serve, and Biden’s ability to Build Back Better.

For more on this topic, please see similar comments submitted by the American Council on Renewable Energy, Ceres, and the American Clean Power Association.




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