- Key insight: The recently released proposal to weaken bank capital standards prioritizes the short-term capital efficiency of the largest banks over the long-term economic security of American families.
- Supporting data: This proposal lowers common equity Tier 1 capital for the largest banks by almost 5%; for globally systemically important banks, that drop comes to an astounding $60 billion.
- What's at stake: With the Fed supervisory staff cut by over 30%, similarly debilitating staff cuts at the other agencies, and capital requirements being slashed through this proposal, the FFIEC is creating a "perfect storm" for the next financial crisis.
Banking is built on trust, and that trust is maintained through rigorous oversight. Of the three federal bank regulatory agencies, the
It seems that's now at risk. Given recent and expected changes at the Fed, it is likely that all three agencies will serve as conduits for implementing the Trump administration's politically motivated deregulatory agenda. This sets the perilous precedent of the Federal Financial Institutions Examination Council, or , becoming more of a political advocacy body than an independent regulatory council and lays the foundation for future financial crises, all while marketing it as "regulatory alignment."
The recently released proposal to
Let's begin with bank capital, which is much more than a line item. Bank capital is the cushion that prevents a financial crisis from becoming a neighborhood catastrophe. This proposal lowers common equity Tier 1 capital for the largest banks by almost 5%; for globally systemically important banks, that drop is even steeper and comes to an astounding $60 billion. History has shown that when large banks are undercapitalized, the resulting "credit crunches" hit LMI communities first and hardest. These reductions are ill-advised and ill-informed.
Chair Travis Hill wants to shift resolution planning away from lengthy bank-generated narratives and toward rapid access to critical operational data during failures.
I am particularly concerned about the reliance on short-term wholesale funding, which has grown from 30% to 40% of assets since 2016. The industry calls this "hot money" for a reason: not because it's particularly attractive but because it's prone to runs. Rather than strengthening protections against that volatility, the proposal reduces the impact of this risk on capital scores. When banks gamble with unstable funding models, LMI consumers pay the price through lost access to credit and homeownership opportunities when the market inevitably tightens.
The proposal also includes two dozen negative deviations from international Basel III standards. That sentence alone should set off alarms throughout the global banking system. When I worked for a European financial institution, I was told there would never be an American CEO because, "You cowboys like to blow up the financial world every decade or so, just for fun." This proposal validates that statement. By allowing banks to use their own internal models to calculate risk without a standardized floor, we are essentially letting banks grade their own homework. We have seen this before with mortgage-backed securities and collateralized debt obligations and it was our communities, not bank executives, who lost their homes and wealth as a result. Are the regulatory agencies' memories so short that they've already forgotten the lessons we learned from the 2008 financial crisis?
Finally, the proposed standardized approach is described as a simplification, but it lowers the capital requirements for institutions under $100 billion by almost 8%. This is not a targeted plan to support community-based lending. It is a giveaway that makes
We all strive for a financial system that is safe, sound and fair. This proposal moves us in the opposite direction, prioritizing the short-term capital efficiency of the largest banks over the long-term economic security of American families.
