Manuel Balce Ceneta/AP Photo
Federal Reserve chair Jerome Powell participates in a conversation at the Economic Club of Washington, July 15, 2024, in Washington.
Lost amid the debate—OK, it’s a story about bank capital, it probably would have been lost anyway—was the Federal Reserve’s announcement that it plans to lessen the burden on big banks to cover their own risk-taking activities. The decision was laid out in a speech on Tuesday by the Fed’s vice chair for financial supervision Michael Barr at the Brookings Institution.
The new proposal on bank capital, which once was to be applied to banks with more than $100 billion in assets, will now be limited to banks with more than $250 billion. This is yet another gift to the “stadium banks,” which won similar exemptions in the 2018 bank deregulation law, which some have attributed as a cause of the collapse of Silicon Valley Bank. Even Barr argued that inadequate bank capital among such large regional banks was a cause of the spring 2023 collapse. He’s completely reversed himself now.
In addition, the capital surcharge for the biggest banks, above $700 billion in assets, will be cut by more than half, down to a 9 percent increase in capital requirements from a 19 percent proposal earlier. That’s about $100 billion in savings for those big banks. Other banks still eligible for the proposal would have to raise capital by 3 to 4 percent.
While Barr, as the vice chair for financial supervision, had to make the announcement, this is obviously the work of Fed chair Jerome Powell, who has been lobbying internally for bank capital weakening ever since the initial “Basel III” standard—a suggested requirement for the world’s biggest banks—was proposed. Some Democrats on the Fed’s board, like Philip Jefferson, were aligned with Powell, according to sources who spoke to the Prospect. But Powell has been holding meetings with Wall Street bankers for months, and made his opposition public last year. Powell owns this decision, a request of his banker pals. And if disaster strikes, it will be his fault alone.
A dubious yet ubiquitous campaign from big banks to lower their capital requirements has been going on for months, claiming that nobody would be able to get a mortgage if big banks had to plan for their own risk-taking. Sen. Elizabeth Warren (D-MA) put it succinctly in a statement: “The Fed caved to the lobbying of big bank executives.”
It was previously reported that there wasn’t unanimity on the new rules across the other agencies that have to agree to it. But the heads of those agencies expressed their willingness to go along with it in statements to the Prospect.
A dubious yet ubiquitous campaign from big banks to lower their capital requirements has been going on for months.
Both the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) backed up Barr’s statement that the new bank capital rules constituted “a joint effort with my counterparts.” FDIC chair Martin Gruenberg said that the agencies “worked cooperatively on the Basel III proposal,” and that he “look[ed] forward to the agencies working together to bring Basel III to a conclusion that will strengthen bank capital and bolster financial system resilience and stability.” Acting head of the Office of the Comptroller of the Currency (OCC) Michael Hsu echoed those comments, saying the changes “reflect the work the three agencies undertook together.” He added that “to ensure that the capital requirements for the nation’s largest banks are modernized and strengthened, I am committed to working with my peers on next steps to drive the Basel III endgame to closure.”
In his talk, Barr cautioned that “the agencies have not made final decisions on any aspect of the re-proposals,” calling Tuesday’s announcement “an interim step.” Under typical administrative procedure, the Fed’s rules would have to be issued formally, not just in a speech at Brookings. Then public comment would be taken in and analyzed, and a final rule published. That’s a long way off, given that a proposed rule hasn’t even been filed.
The FDIC will reportedly study the plan at a board meeting later in the month. FDIC board member Jonathan McKernan summed up the Republican feelings about Barr’s re-proposal by opposing it for “not going far enough.” That means all the Democrats on the FDIC board would have to support it. Gruenberg and Hsu, who as OCC chief sits on the board, would appear to be in favor, but Consumer Financial Protection Bureau director Rohit Chopra is a former Warren aide who shares her view of big banks.
Even delay would be a win for the banks. Delay is their friend, since the re-proposal, if approved, would still force them to gather more capital, albeit less than before. All a stalemate does is allow banks to keep the status quo going. And if Donald Trump wins the election, the re-proposal is likely to be nixed entirely.
That may be the banks’ own thinking, in fact. Predictably, in light of the industry’s “give an inch, take a mile” approach over the past several decades, lobbyists saw the re-proposal as a new starting point that needed to be slashed even more. “The Street may have been looking for a greater reduction from the original proposal,” one analyst told Reuters after witnessing big-bank stocks fall on the announcement.
WHILE THIS CALAMITY ON BANK CAPITAL CONTINUES, a separate calamity from the failure of Synapse Financial, whose bankruptcy has led tens of thousands of people who thought they had FDIC-insured “neobank” accounts to lose access to their money for the past four months, proceeds unabated. A letter led by Sen. Warren and provided to the Prospect highlights the continued fallout. The letter stresses the hidden risk to customers inherent in partnerships between banks and fintech companies, as regulators have identified in the past. Yet revenue to “banking as a service” providers was set to increase from $1.7 billion in 2021 to over $17.3 billion in 2026, at least before the Synapse mess.
Many of these fintech apps displayed erroneous information that their depositors’ accounts were backed by the FDIC; Warren’s letter asks the agency to ensure that those claims are taken down. Messaging about FDIC-insured deposits, incredibly, still exists on the website of Yotta, even after Yotta customers lost access to their life savings.
The letter also states that the current practice of having banks regulate their own partnerships with fintechs and middlemen “is not working,” and that the OCC, the FDIC, and the Fed need to step in with direct regulation over the third-party providers to neobanks. The CFPB has already proposed a form of this oversight for consumer protection laws, but the prudential regulators have additional tools.
The Fed did penalize Evolve, one of the banks involved in the Synapse situation, for poor risk management practices relative to these partnerships. “However, despite your actions, banks are not appropriately overseeing these entities,” the letter states. “The growing integration of the services offered by apps … requires additional oversight by your agencies—and the establishment of clear rules instead of the ad-hoc enforcement approach that you have used to date.”
Raising compliance costs for fintechs might put some of these innovations out of reach. Given the disaster, practically for the first time since the Great Depression, of people being separated from their money, that would be a very good thing indeed.
Yet these agencies have blown a year struggling to come together on the clearest risks from the biggest banks. As the Synapse failure shows, coordination among the regulators is critical for systemic safety. But getting the regulators to agree on any kind of standards that might damage banks’ God-given right to maximize profits regardless of consequences to anyone else would be asking them to actually fulfill their mission as regulators. This has thus far proven to be too much to ask.
