Higher bank capital requirements would harm low-income borrowers most

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The Biden administration is attempting to use recent bank failures to exert additional government control over the banking industry. Federal regulators and Biden acolytes are wrongly pointing to current capital requirements as the reason for the collapse of institutions like Silicon Valley Bank (SVB) and Signature Bank. As a result, they are pursuing misguided regulations that are likely to have negative economic consequences, especially on underserved American communities.

In July, federal banking agencies announced a proposal to increase capital requirements on U.S. banks. Capital requirements are the regulations on banks and other institutions that determine how much capital they must hold at any given time to protect against potential losses. The Biden administration tapped Federal Reserve Vice Chair Michael Barr and FDIC Chairman Martin Gruenberg to market the plan. Their stated reasoning is to prevent more bank failures.

However, the closures that made headlines earlier this year had nothing to do with capital requirements, and the proposed rules would not have prevented the fundamental problem of mismanagement by both bank leadership and regulators. For their failures, the Biden administration will reward these same regulators with even more power and authority over the economy.

Increasing the amount of capital banks must hold limits their ability to offer affordable and accessible credit. Naturally, more stringent requirements will force banks to reduce credit to many low-income Americans, especially those with lower credit scores. Banks would also be much less likely to increase credit card limits and provide home equity lines of credit. This reduction in available credit could kick many Americans while they are down, increasing their credit utilization and potentially hurting their credit scores. In this way, the Biden administration's plan is harmful to individuals struggling to make ends meet.

The proposed regulations would hinder increasing homeownership, a big hit to individuals and communities that face barriers to building generational wealth, illustrated by the homeownership gap. The homeownership rate for Hispanics in the U.S., for example, hit a 50-year low in 2015. While numbers have since improved, it would be more difficult to see additional progress under banking rules that limit lending and available credit. Homeownership is a key of the American Dream and a pillar of economic progress, stability, as well as an important element in building generational wealth.

Properly used credit is another factor in improving the economic condition of communities that suffer from a significant lack of investment. For example, majority Hispanic communities tend to see lower median credit scores than do majority non-Hispanic white communities. This is especially the case for young adults, as 25- to 29-year-olds in majority Hispanic communities have a median credit score of 644, compared to 687 for their non-Hispanic white peers. Young adults in Hispanic communities are more likely to see their credit scores decline as they grow older—26.2% of these Americans saw their scores decrease between 2010 and 2021. This was the case for only 21% of young Americans in majority white communities.

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A major factor driving this status is that Hispanic communities have less wealth at their disposal to set up new generations for financial success. Data from the 2020 census shows that American Hispanics live in households with a median net worth of $52,190, compared with $195,600 for non-Hispanic individuals. The downstream effect of increasing capital requirements would perpetuate this status by making it even more difficult for large segments of young adults to build up and improve their credit. Properly used credit, after all, is a helpful tool for increasing financial well-being.

If all this was not bad enough, stricter capital rules would constrict the availability of affordable small-business loans, especially from the many regional banks that serve as major sources of small-business lending. For example, 39.3% of Hispanic entrepreneurs already report that access to proper financing remains a huge problem, compared to only 18% of non-Hispanic white small-business owners. Hispanic-owned businesses contribute over $800 billion to the economy each year, so misguided policies that hurt them affect the economy as a whole.

Plans to increase capital requirements are based on recommendations from an entity located in Switzerland known as the Basel Committee, which works toward global standards for banking regulations on which participating countries model their domestic rules. The Basel Committee's recommendations are made with limited transparency, and the Biden administration appears to be relying on the committee's recommendations to justify their own political agenda.  Notably, the administration is even going above the standards as outlined in Switzerland.

The zeal for more rigorous capital requirements is another example of Washington failing to consider how harsher regulations would exacerbate key economic challenges and hurt consumers in the long run. During a time of economic uncertainty, we should not pursue an agenda that will cut Americans off from needed financial services like loans and mortgages.

The proposal to increase capital requirements is regulatory overreach.  Lawmakers, especially those in the Senate, should acknowledge the risks from the Biden administration's onerous plan and take steps to demand greater accountability, even if that means holding up new nominations to the Federal Reserve.