Bair Takes On Treasury And Fed By Backing Collins’ Capital Requirements Amendment

During the financial regulatory reform debate, an amendment from Sen. Susan Collins (R-ME) was adopted without much fanfare. The amendment mandates that big banks with riskier profiles need to hold more capital against losses and that bank holding companies (like Goldman Sachs, Morgan Stanley, and Bank of America) be subject to the same capital requirements as banks. It generated so little controversy that it was approved via a unanimous consent request.

However, since then, the Treasury Department and the Federal Reserve have been working behind-the-scenes to kill the amendment.

As Kevin Drum wrote, “we can set reasonable floors [for capital], and when both Treasury and the banks are fighting those floors tooth and nail it doesn’t bode well for how seriously they take this stuff.” Federal Deposit Insurance Corp. Chairman Sheila Bair, however, seems to take this stuff very seriously, as she has penned a letter in strong support of the Collins amendment. Bair argued that the amendment will prevent financial conglomerates from treating their federally insured depository arms as a backstop in an emergency, which leaves the FDIC on the hook if the firm goes bust:

The thrust of U.S. law and regulation governing holding companies is to ensure that risks undertaken by the parent company and the nonbank subsidiaries do not compromise the safety and soundness of insured banks…As we saw during the crisis, the source of strength doctrine was turned on its head as insured banks often had to come to the aid of their holding companies — holding companies that in too many cases also required substantial federal support…[T]he Collins amendment would constrain the Federal Reserve’s discretion to lower capital requirements below levels that would be implied by the source of strength function expected of holding companies.

While not eliminating regulatory discretion, the amendment does ensure that there’s a floor for capital requirements below which regulators can’t go. It also more closely correlates capital requirements with risk profile, and ensures that financial firms that aren’t traditional banks (but want to act like banks) get regulated like banks. These are all good things. As Mike Konczal wrote, “ultimately, here’s the big question: is the way we measured leverage and the amount of capital we asked banks to hold in 2007, one year before the massive crisis that has devastated our real economy, good enough? Or do we need to get serious about increasing it?”

As Tim Fernholz noted, the Collins amendment “speaks to the broader concern that we want banks taking less risk in general and focusing less on trading and more on lending.” As financial reform moves into conference committee, those shaping the bill should be taking Bair’s advice by giving the Collins amendment serious consideration.