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In late July, the three major bank regulatory agencies proposed regulations that would modestly increase capital requirements for banks. The most immediate impact is on banks with assets of between $100 million and $250 million, which were previously exempted from higher capital standards. But all large banks would have to hold slightly more capital against loans and other investments. The regulations are blindingly complicated, based on complex formulas and risk-weights, but on average they will increase capital holding requirements for large banks by about 20 percent.
These higher capital requirements are nothing but good, a reflection of changes that reformers have urged for decades. They will serve to dissuade speculative investments, since more of the bank’s own capital would be at risk. By reducing leverage ratios, they will reduce risks.
The requirements explicitly do not affect community banks with assets under $100 million, the kinds of banks that do not pose systemic risks in the event that they go bust. On the contrary, when the speculative activities of big banks cause a major collapse, as in the 2008 financial crisis, government typically bails out the largest banks but lets the community banks go under.
Some 400 community banks failed between 2009 and 2011, mostly through no fault of their own but because the crisis caused by the large banks put their collateral underwater. An epic example was ShoreBank of Chicago, the model community development bank, which served small businesses and homeowners on Chicago’s mostly Black South Side.
ShoreBank did not go in for subprime mortgages, but the subprime crisis destroyed property values on the South Side. The Treasury could have saved ShoreBank for a tiny fraction of what it spent bailing out Wall Street. But ShoreBank and other community banks were not too big to fail; they were too small to matter.
So better capital standards for large banks are very much in the interest of community banks. Yet the community banks and small businesses have been used as fronts for the biggest banks in the industry’s hysterical lobbying campaign to roll back the mildly higher capital standards.
I recently received a hilariously revealing email from a PR firm working with Goldman Sachs. The sender must have lazily sent it to any journalist working on financial issues. The email, from Ben Sheidler, a principal of the CGA Group, touts a front group created by Goldman called Goldman Sachs 10,000 Small Businesses Voices.
Sheidler repeats the large-bank talking points, warning that higher capital standards will reduce access to investment capital. In his words, this would squeeze smaller borrowers, make borrowing more expensive to smaller businesses, and even “diminish global competitiveness,” ignoring that banks in other nations will be subject to comparable capital standards under the international Basel Accords, which the regulation on capital standards carries out.
Better capital standards for large banks are very much in the interest of community banks.
These arguments are self-serving nonsense. Since the biggest banks profit by taking greater risks with higher leverage ratios, this is really about the bottom line of Wall Street’s biggest banks and the related executive compensation. It’s not about solicitude for small businesses or community banks, which are being unwittingly put by larger lobbying forces in the role of useful idiots.
Sheidler closes by advising me, “In the coming weeks, 10KSB Voices will be advocating against this proposed rule because it would put the squeeze on small businesses. If this is an area of interest for you, I’d be happy to keep you posted on developments by 10KSB Voices as their advocacy efforts ramp up.”
Yes, thank you, Ben. What a pleasure to be a fly on the wall of Goldman’s lobbying strategy.
These marginally improved standards were the result of fierce infighting and compromise among the bank regulatory agencies. At the Fed, Michael Barr, the vice chair for supervision appointed last year by President Biden, turned out to be a tougher regulator than many expected. He dragged the Fed kicking and screaming into signing off on the draft rules for higher capital standards, even against the wishes of chair Jay Powell.
But the standards are still only proposed regulations, and the banking lobby is working mightily to water down the final rules. An odd ally is Michelle Bowman, the Fed governor appointed to the slot that supposedly looks out for the interests of community banks. Bowman has given speech after speech that read as if they had been ghostwritten by the biggest banks. One industry publication referred to Bowman as “the Fed’s anti-Barr.”
Speaking of the proposed capital rules at a Salzburg seminar on bank regulation in June, she declared: “Under the weight of overly burdensome or redundant regulation, the business models of some banks may simply cease to be viable. Many banks would be unable to operate under the weight of increased compliance costs.” (Remember, the rules do not apply to community banks at all.) And in another speech, she explicitly declared that recent bank failures do not justify higher capital standards.
Although the largest Wall Street banks are trying to use the community bankers as poster children for weak capital standards, organizations that actually uplift the voices of the community bankers themselves have lauded Barr and praised the new draft rules. Rebecca Romero Rainey, CEO of the Independent Community Bankers of America (ICBA), said in a speech after the draft rules were released, “ICBA and the nation’s community banks commend Vice Chair Barr for affirming that pending regulatory capital standards will target the largest and riskiest financial institutions, and we caution regulators to ensure new capital standards have no trickle-down effect on institutions below $100 billion in assets, including community banks.”
Yet the American Bankers Association, a majority of whose members are community banks, keeps mouthing the line of the biggest banks. After the draft rules were released, Rob Nichols, who heads the ABA, said in a statement, “Far from simply meeting international standards, these changes will require banks operating in the U.S. to meet even higher capital levels without any justification, and the proposal effectively rolls back regulatory tailoring that Congress approved on a bipartisan basis.”
“The ABA is where the Wall Street lobby’s standard approach is on display: Hide the big banks behind a school of little fish,” said Carter Dougherty, spokesperson for Americans for Financial Reform, a coalition of pro-regulation groups. “Industry solidarity might be good politics for Wall Street, but it’s hard to see how it gets anything done for community banks. How many times do we bail out big banks before community banks quit providing cover to Wall Street?”
As for the charges that higher capital requirements will make it harder or more expensive for borrowers to get credit, the fact is that they will not affect ordinary borrowing at all. Interest rates, of course, are a function of Fed monetary policy, not capital standards. The indispensable group Better Markets has issued a point-by-point rebuttal of the bankers’ claim about the supposedly negative effects of higher capital standards.
“Bank capital is critical,” according to Dennis Kelleher, president of Better Markets. “However, maximizing Wall Street’s bonuses depends on minimizing capital and that’s why Wall Street fights to prevent regulators from requiring them to have enough capital.”
The tension between big-city banks and small country banks dates to the earliest days of the republic. In the 1930s, when FDR was launching the SEC, the New York Stock Exchange used the tactic of enlisting small regional stock exchanges to complain that regulation would hurt their business.
Capitalists have always enriched themselves by using what Louis Brandeis famously termed other people’s money. How ironic, and characteristic, that the biggest capitalists are resisting the requirement that they hold more of their own capital.
