BankThink

Dear regulators: Don’t loosen megabank capital standards

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Washington implemented stronger capital rules on the biggest banks following the 2008 financial meltdown to mitigate risks to the financial system and protect against future crises. Yet policymakers are now proposing to roll back enhanced capital standards on the largest bank holding companies and their subsidiaries.

As policymakers continue reviewing financial services regulations, they should not be tempted by a renewed campaign from the largest and riskiest institutions to weaken vital safeguards on our financial system.

Federal regulators launched the push to ease capital standards on global systemically important bank holding companies, or G-SIBs, and their federally insured subsidiaries. Their plan would reduce capital levels required by the enhanced supplementary leverage ratio standards that were introduced in 2013. Now some members of the House and Senate have joined in, asking the Federal Reserve to eliminate “excessive” capital requirements by recalibrating a capital surcharge on the megabanks.

Washington should hit the brakes on this dangerous trend toward relaxing needed protections for our financial system and economy. Community bankers remember the Wall Street crisis all too well, when the looming failure of the nation’s largest financial institutions threatened to bring down the financial system and resulted in a massive taxpayer-funded bailout. The impact of that calamity still reverberates in many local communities. In the case of those community banks and other small businesses that went under due to the yearslong economic downturn that followed, the effect is irreversible.

As a nation, we cannot afford to repeat the mistakes that contributed to that catastrophe. The G-SIBs —with their immense size, international scope and exposure, interdependence on one another and propensity to take risks — should not be allowed to operate without elevated levels of high-quality capital. But that is precisely where these proposals are headed.

According to regulators, their plan for the enhanced supplementary leverage ratio would slash minimum capital requirements by $9 billion for G-SIB holding companies and $121 billion for their depository subsidiaries — dramatically reducing capital that would absorb credit losses in the event of another downturn. By comparison, the Deposit Insurance Fund that the Federal Deposit Insurance Corp. maintains to insure the nation’s banking system holds $95 billion, illustrating the magnitude of the proposed capital reduction.

As former FDIC leaders Sheila Bair and Thomas Hoenig warned in a recent joint op-ed, these cuts would make the financial system less resilient and increase the odds of another, more severe crisis. Higher capital levels not only inhibit failures during crises, but also allow for sustained lending during downturns that can limit their damage.

Meanwhile, congressional calls to rework the G-SIBs’ capital surcharge are based on a faulty presumption — that it should go no further than international standards. The surcharges phase in up to 4.5% in additional minimum capital requirements for the largest banks, which they say is hampering their ability to compete globally.

But Fed Chairman Jerome Powell has himself said that the biggest U.S. banks are highly profitable and competitive in the global marketplace and earning good returns on their capital. And Bair — who headed the FDIC during the 2008 crisis — has said stronger U.S. capital requirements were a key reason the domestic banking system and economy recovered more quickly than in Europe. With the United States now exceeding the longest bull run in history, dating all the way back to 2009, undoing our current risk-mitigation tools and lowering capital levels now — before they’ve been tested by the next downturn — is just plain foolhardy.

Amid continued instability in the international banking system marked by exposure to Turkey’s currency crisis, the fragile state of Italy and Greece, and the uncertain future of the European Union, the European banking system is not a model regime. Instead, federal agencies should retain the current capital standards to protect against disruptions to the banking system and economy from the nation’s largest financial firms.

As the U.S. economic recovery is now finally beginning to extend to all corners of the country, we cannot afford to backtrack at the behest of sleekly reformulated lobbying groups representing just a handful of the nation’s 5,700 banks. To protect ourselves from the continued threats posed by systemically risky financial firms, we must preserve a capital regime strong enough for a banking system that continues to be concentrated in fewer and fewer hands.

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