ATR Op-Ed in The Hill: “The regulators’ new bank capital proposal ignores costs to consumers”

On August 9, 2023, The Hill published an op-ed by ATR’s Director of Financial Policy, Bryan Bashur. The article talks about how a new rulemaking issued by the Federal Reserve, Federal Deposit Insurance Corporation, and Treasury Department will restrict access to credit for consumer products, such as credit cards and mortgage loans.

The op-ed begins by describing how regulators issued a new proposal to force large banks to hold additional capital. It also briefly describes the proposal’s effect on financial services:

The Federal Reserve, Federal Deposit Insurance Corporation and the Treasury Department issued a new proposal to force large banks to build up more capital through retained earnings and additional stock issuances without any input from Congress. This is the result of international pressure from an organization with no legal authority to impose regulations in the U.S.

These new rules will make borrowing more expensive, hamper dividends and share buybacks and reduce the availability of credit cards and mortgage loans with agreeable terms and conditions.

Next, the article briefly discusses the Basel Committee on Banking Supervision and how it influenced the regulators’ proposal:

The Basel Committee on Banking Supervision — an international conglomerate of central banks and regulators based in Basel, Switzerland — issued its first bank capital regulatory framework in 1988. Since then, capital requirements have become increasingly more complex and stringent. The basis for the regulators’ new proposal stems from the finalization of the most recent iteration of bank capital regulations, Basel III.

The new proposal is an end run around Congress because it adopts legally binding capital requirements originating from an organization that exhibits no supranational authority in the U.S. It flies in the face of statutory mandates authorized in the bipartisan Economic Growth, Regulatory Relief and Consumer Protection Act, which tailored capital requirements strategically. According to FDIC vice chairman Travis Hill, the proposal is a “repudiation of the intent and spirit of” the bill.

However, in certain cases the proposal is more restrictive than the final Basel III framework:

The proposal, in some cases, is stricter than the final Basel III framework. For example, the proposal uses more punitive calculations for residential mortgages held by banks. The calculations are 20 percent higher than Basel III, even though the proposal contains no “evidence to support the sizing of the surcharge,” according to one FDIC board member. These burdensome requirements could weaken American bank competitiveness with foreign-owned banks, or force banks to look for merger opportunities to offset increases in cost.

The piece goes on to talk about more specific examples of how increased capital requirements harms business and limits availability of credit:

The competitive nature of the U.S. banking sector is what makes lending costs so sensitive to increased capital requirements. One study found that if a bank is “forced to adopt a capital structure that raises its cost of funding relative to other intermediaries” by as little as 0.2 percent then it may “become much less profitable” or “lose most of its business.”

The proposal also imposes stringent leverage evaluations for banks that previously did not have to comply. The new mandate will force banks to limit funding for credit cards or reduce exposure to securitizations that fund auto loans and mortgages. One paper from Columbia Business School found that relaxing, instead of expanding, the supplementary leverage ratio would allow banks to expand credit “during economic downturns.”

Certain board members and high-ranking officials serving in the agencies that issued the proposal expressed strong concerns that the proposal may be too burdensome. The dissension among regulatory officials is apparent:

Even though Fed Chair Jerome Powell voted in favor of the new rules, he indicated that costs associated with the new rules need to be taken into consideration. He stated that heightened capital requirements “reduces access” to credit, and the proposal could limit liquidity in capital markets by restricting bank trading activity. Additionally, Fed governors Michelle Bowman and Christopher Waller voted against the proposal because in their opinion the costs of the new capital requirements would outweigh the benefits.

There is also significant opposition from lawmakers in the U.S. Senate and House of Representatives:

Congressional concerns with the proposal are far and wide. Sen. Thom Tillis (R-N.C.) and 10 other U.S. senators signed a letter to the Fed in anticipation of the regulators’ new capital rules. The senators criticized the Fed for its lack of transparency leading up to the release of the proposed rule. The letter acknowledged that Michael Barr’s justification for increased capital requirements contradicts the Fed’s findings in the 2023 stress tests. Banks passed the Fed’s stress tests with flying colors.

Reps. Andy Barr (R-Ky.) and Bill Foster (D-Ill.) sent a bipartisan letter asking the regulators to be more transparent about how they developed their proposal.

The proposal claims that regulators do not have to conduct an analysis of the effects on small entities. However, under federal statute, small entities are broadly defined and are not restricted to small banking organizations. Accordingly, Reps. Roger Williams (R-Texas) and Dan Meuser (R-Pa.) sent a letter to regulators raising concerns about the proposal’s effect on the accessibility and affordability of small business lending. Constraining credit could embolden the federal government to crowd out private lending.

The op-ed ends by stating that regulators need to produce a detailed analysis of the costs of the proposal on the broader economy. Neglecting costs could invite legal headaches down the road:

As the regulators receive comments and turn to finalize the proposal over the next year, they should explicitly quantify and enumerate the direct and indirect costs the proposal will impose on banks and their counterparties. Ignoring costs contravenes U.S. Supreme Court precedent that found “[n]o regulation is “appropriate” if it does significantly more harm than good.”

The regulators need to tread carefully or risk exposing their arbitrary proposal to future litigation.

Click here to read the full op-ed.