This week, with Congress back from its Memorial Day recess, the conference committee tasked with reconciling the Senate and House versions of financial regulatory reform will begin to meet, with the goal of putting a final bill together by July. According to House Financial Services Chairman Barney Frank (D-MA), three big areas will have to be hashed out: Sen. Blanche Lincoln’s (D-AR) provision forcing banks to spin off their swaps desks, the Volcker rule, and Sen. Dick Durbin’s (D-IL) new interchange fee regulation.
But one other area will also have to be addressed: the ways in which the bills approach capital requirements for big banks. The Senate version includes an amendment from Sen. Susan Collins (R-ME) that would place a floor under capital requirements (that regulators couldn’t go below) and increase capital requirements in accordance with bank size and risk (so bigger, riskier banks would need to have more money on hand to cover potential losses).
The banks, of course, don’t like this idea very much:
A push to require bank-holding companies to hold better capital has sparked a lobbying drive because it would force the industry to raise as much as $1.3 trillion from its balance sheet if the changes were to be enacted, according to one estimate…“It would cause very significantly to decrease the availability of loans,” said Edward Yingling, president of the American Bankers Association.
Collins is reportedly working with the financial industry to “ameliorate their fears,” but hopefully she isn’t giving in to a lot of demands. After all, her amendment is one of the most useful pieces of the Senate bill.
Throughout the financial reform debate, the banks have claimed that every proposed regulation would hinder credit and decrease the availability of loans. The same threat, used over and over, begins to ring a bit hollow. And it’s a simple fact that, prior to the economic meltdown, big banks were incredibly overleveraged, and did not have enough funding on hand to cover their losses, which necessitated federal intervention. AIG, for instance, could not come close to covering the losses on its vast array of credit default swaps.
Collins’ amendment would remove some regulatory discretion by mandating minimum levels of capital. As regulators have been complicit in giving big banks the go-ahead to leverage up to extraordinary heights, this is a good idea. FDIC Chairman Sheila Bair has called Collins’ amendment a “critical element” of financial reform that will “ensure that risks undertaken by the parent company and the nonbank subsidiaries do not compromise the safety and soundness of insured banks.”
As Nobel Prize winning economist Joseph Stiglitz wrote in Politico today, “every provision that levels the playing field [between big and small banks] — imposing additional restrictions on risk-taking, setting higher capital requirements or imposing additional fees — needs to be retained.” And indeed, it makes sense that larger banks that are taking more risk be subject to higher standards, as their implosion is able to drag down the wider economy.