Doreen Eberley, new york regional director for the Federal Deposit Insurance Corp., sounded certain in saying that large banks could accumulate the capital demanded of firms their size.
Beyond the "absolutely doable" baseline 7 percent common equity requirement, systemically important banks could shoulder a capital surcharge, she said, "without having to go through extraordinary efforts."
It was an early show of confidence considering that her remarks, made at a June conference in New York for women in the banking industry, came two weeks before the meeting where international regulators decided how much additional capital the biggest institutions would have to maintain.
She wasn't the only regulator prior to the June 25 announcement out of Basel to place bets on the ability of banks to cope. If Federal Reserve Chairman Ben Bernanke had any concerns about how far the international body would go in assessing a surcharge, he did not betray them when he declared two days before the rulemaking session, "I don't think we are on the wrong side of that tradeoff" that capital requirements represent between safety and growth.
The aplomb on this side of the pond may have said something about U.S. regulators' handle on the thought process in Basel. (The capital terms that got hammered out were generally in line with U.S. officials' predictions and well below what was sought, for example, by the Swiss.) There was another subtext to their self-assuredness, though, and it made bankers at the biggest institutions look an awful lot like the boy who cried wolf.
Nearly every high-profile attempt at reform in this country has been met with the seemingly reflexive protest of banks or their lobbyists. And who could blame them? Many of the regulations that have been adopted in recent years will have serious consequences for profitability.
But the biggest banks have only gotten stronger since Congress decided to spring into action and re-regulate the industry, despite the costs of the CARD Act and other legislation putting new limits on the sector.
Meanwhile, Elizabeth Warren has yet to actually shoot lightening bolts from her eyes, and the Fed's new rules on overdraft protection have been far less damaging to big banks than feared, with customer opt-in rates exceeding expectations at several large institutions. When your worst casualty to date in the new battles over regulation is the death of debit rewards at Chase, it's hard to argue you're being kept down by the man.
By now, industry leaders and their allies in Washington have well-practiced speeches about how the actions of regulators and lawmakers could have dire consequences for credit availability to the economy.
The concern on behalf of customers may very well be genuine. But if bankers turn every regulatory proposal into a hostage-taking situation, customers eventually are going to get tired of feeling like the guy in the photo holding today's newspaper. This is especially true for the largest banks, which did the most during the crisis to try the public's patience.
Robert J. Shapiro, the Commerce Department's undersecretary for economic affairs from 1997 to 2001, says that banking is "not the only industry that tries to claim that the life of the nation depends upon their not being regulated or having ever higher profits." And though banks perhaps are the most successful at it—Shapiro, now chairman of the economic advisory firm Sonecon in Washington, describes having seen similar efforts made by the agriculture and defense sectors—financial services firms may want to be more discriminating when it comes to choosing their battles, especially with so much financial rulemaking left to be done around the Dodd-Frank Act.
"The financial system is critical," Shapiro says, "and it is true that certain kinds of regulation would impair finance sufficiently so that it would injure the economy. But limiting their swipe fees would not be one of them."
Nor, in the judgment of regulators, would a capital surcharge in the range of 1 percent to 2.5 percent.
Fed Gov. Daniel Tarullo probably did big banks a favor when he floated the idea of a 7 percent surcharge, in a June speech at the Peter G. Peterson Institute for International Economics. That suggestion understandably struck fear in the hearts of bankers, and not surprisingly it was the part of the speech that the financial press chose to play up. But it only described the most extreme scenario under just one of the three possible methodologies he mentioned, the methodology by which the surcharge could be calibrated based on the expected cost of a failure by a systemically important firm.
In the end, this let banks see how much worse off they might have been, perhaps dampening the industry outcry that would have otherwise been inevitable, and saving big banks the embarrassment of once again appearing to cry wolf.
