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Proposed capital rules for big banks are mostly about limiting risky bets on securities and derivatives trading, not small-business or mortgage lending.
The recent scandal involving sexual harassment at the Federal Deposit Insurance Corporation, according to my colleague Robert Kuttner, only came to light after the big banks sought to disable a new rule the FDIC and other financial regulators have been working on to raise capital requirements on institutions with more than $100 billion in assets. Setting capital reserve rules at the appropriate level of risk definitely impacts big banks by reducing the leverage that they can use to spin up profits, but protects the public, and arguably the banks themselves, by providing a cushion to guard against securities losses and deposit runs. Bank executives and lobbyists are more worried about the former than the latter.
FDIC chair Martin Gruenberg is seen as unlikely to resign in the wake of the harassment scandal, which means that the agency will have a full complement of Democratic appointees on the board to advance the capital rules. But that doesn’t mean the banks have given up. They’ve turned to an old standby: third-party advocacy groups that weigh in on their behalf.
When a think tank or research organization, with the imprimatur of independence, appeals to regulators to change policies in ways that benefit banking interests, it carries more weight. That’s why big banks hand out a lot of money to these groups, in the hopes that it leads to favorable policy recommendations. So Wells Fargo giving a $50 million grant to the National Association for the Advancement of Colored People (NAACP) does not necessarily come without strings, even if they appear invisible at first glance.
In my research and reporting during and after the financial crisis, a strange connection would routinely pop up, where headline civil rights organizations and big banks would advocate for the same things. When I looked into the background, I would often find large monetary contributions. That’s what got my spider sense tingling when I saw some of the public comments on the capital rules.
Hollies Winston, the mayor of Brooklyn Park, Minnesota, a suburb of Minneapolis that’s majority-minority and about 30 percent Black, submitted a comment stating that “raising capital requirements for banks … could potentially hinder the ability of Black-owned businesses to secure the financing they need to start, grow, and sustain their operations.” Angela Lang, executive director of Black Leaders Organizing for Communities (BLOC), a community organization in the Milwaukee area, cited an Urban Institute analysis in her comment, saying that the proposal would hurt African American borrowers “who have faced decades of redlining, discriminatory lending practices, and other forms of economic disparities.” Other comments like this have been submitted.
Public comments do matter on complicated rules like this. The banking regulators extended the comment period, which was supposed to close this Thursday, to next January.
Neither Winston nor Lang responded to the Prospect’s questions about whether they were persuaded or contacted by any civil rights organizations to comment on the new rules. But their interest in a capital reserve rule that affects only 32 banks in the entire country was curious. So was the random shout-out to the Urban Institute.
Setting capital reserve rules at the appropriate level of risk protects the public, and arguably the banks themselves.
A research organization founded by Lyndon Johnson in 1968, Urban uses data to solve nagging social and economic policy problems, particularly racial gaps. In the case of the bank capital rules, Urban has taken the position that they will harm access to credit for low-income borrowers, which aligns directly with the claims of the largest lobbying organizations from the banking industry.
The Urban Institute happens to receive millions of dollars per year from large banking organizations. Among its list of donors, JPMorgan Chase and Wells Fargo gave more than $1 million in 2021 (the last year disclosed), Bank of America and Citigroup’s charitable foundation gave between $250,000 and $499,999, U.S. Bank gave between $100,000 and $249,999, and Morgan Stanley gave between $25,000 and $49,999. That’s six of the top seven banks in the country by assets.
Most of the impact of the capital rules hits the four banks above $700 billion in assets— JPMorgan, Wells Fargo, Bank of America, and Citi, all high-level donors to the Urban Institute. While banks between $100 billion and $700 billion in assets will only see their capital levels rise by a nominal 6 percent, for banks over $700 billion, the number is 19 percent.
In funding disclosures, the Urban Institute insists that it maintains full independence. “No funder shall determine research findings or the insights and recommendations of our experts,” the organization states on its website. But this alignment between Urban and the big banks is nothing new. Consistently, Urban researchers have concluded that access to credit is more valuable than regulations to ensure the safety and soundness of the financial system. Whether this alignment is fully independent or whether big banks give to the Urban Institute out of confidence that their researchers will release favorable reports cannot be known.
In a response to multiple questions from the Prospect, Urban Institute spokesperson Linda Argueta said, “Urban does not have an agenda, ideological or otherwise, nor do we take institutional positions on issues. However, researchers have autonomy to pursue new ideas, and they are empowered and supported to share their own evidence-based views and policy recommendations.”
OVER THE PAST DECADE-PLUS, big banks have closed branches disproportionately in Black communities, received downgrades in their ratings on lending to low-income communities of color, earned enormous sums in overdraft fees on disproportionately minority depositors at the height of the COVID-19 pandemic, and settled allegations of racial discrimination in lending during the subprime boom. So why should communities of color worry about their profits?
The Urban Institute analysis, written by Laurie Goodman and Jun Zhu in September, focuses in particular on how increased capital requirements would increase charges on loans with a high loan-to-value (LTV) ratio. While this may sound intuitive since those are riskier loans, to Goodman and Zhu, this means that banks will react by writing fewer of those loans, and that low- and moderate-income borrowers, as well as Black and Hispanic borrowers, would be disadvantaged.
What this fails to point out is that the capital rules would not affect non-bank mortgage lenders at all. The three biggest mortgage lenders in America are non-banks, as well as 15 of the top 25. Non-bank mortgage originators make more loans to low-income borrowers than large banking operations.
Even Urban’s own analysis says that only 52 percent of mortgage originations made by banks would be affected by this rule, which only impacts the largest banking institutions. Of those big-bank mortgage loans, only 13 percent of them had high loan-to-value ratios. But you have to cut that down even further to account for all the non-banks. In sum, only a fraction of mortgage loans will be influenced by these new rules.
Urban’s own analysis says that only 52 percent of mortgage originations made by banks would be affected by this rule.
Indeed, one could argue that expanding access to risky credit is ultimately harmful to minority communities. We do know that Black and Hispanic mortgage borrowers in particular were most affected from the orgy of risk-taking in the financial crisis, with much higher levels of dispossessions and lost equity. That was true even if they did not get a mortgage origination from a big bank, since the Great Recession led to mass unemployment and lost wages.
The idea that higher capital rules hurt Black and Hispanic borrowers is a rehash of what financial institutions have long claimed about access to credit. The organization Center Forward, a centrist group funded by corporate interests, has run advertising campaigns declaring that there are “unintended consequences” from the capital rules. “Because banks will have to hold more assets on hand that cannot be loaned out, the availability of credit across our economy will shrink,” Center Forward alleges.
As former FDIC chair Sheila Bair has written, capital requirements do not force banks to lend less. “Capital requirements simply govern the ratio of banks’ funding that must come from equity versus debt. Banks can fund a loan with equity capital as easily as with leverage,” she wrote in the Financial Times.
Though banks have complained that the rules impose higher capital standards in the U.S. than internationally, such “gold plating” has long been a competitive strength of U.S. capital regulation, not a weakness. Meanwhile, when banks recently weakened regulatory oversight on large regional banks below international standards, the result was the Silicon Valley Bank collapse, which harmed access to capital far more than any regulation might have.
The bank capital proposal is mostly about limiting risky bets on securities and derivatives trading, not small-business or mortgage lending. Having struck out playing an inside game with financial regulators, big banks have gone public with their frustrations, and it seems they are enlisting sympathetic communities in their drive for corporate profits.
This story has been updated to add a comment from the Urban Institute, which was received after publication.
