Bank Lobbyist Nonsense About Capital Rules
Lobbyists are repeating claims about capital from 15 years ago. They are still wrong.
By Carter Dougherty
“You know, just about whatever anyone proposes, no matter what it is, the banks will come out and claim that it will restrict credit and harm the economy…It’s all bullshit.” – Paul Volcker, former Federal Reserve chair
The famously gruff Volcker had no patience for the arguments of the big-bank lobby against higher capital requirements and other regulations just after the 2008 financial crisis. An equally fitting word is “nonsense,” a favorite of Anat Admati, an economist at Stanford University, who has also applied it repeatedly since 2008.
Now, 15 years on, we can look at their rhetoric over the years and conclude that the Wall Street lobby always predicts doom – especially less access to credit – whenever regulators want to toughen capital rules. Those terrible consequences seldom, if ever, come to pass.
The Bank Policy Institute, an American lobby group of big banks, engages in the typical scaremongering: new rules will “create a drag on our economy for years to come — and will hurt working families and small businesses.” The Financial Services Forum, another organization of big firms, makes almost identical claims: “[H]igher requirements would have very real impacts, leading to increased costs and reduced availability for credit to consumers and businesses while harming the competitiveness of the U.S. economy.”
The Federal Reserve has proposed raising capital requirements under the international accord known as the “Basel Endgame,” after the Swiss city in which US regulators and their counterparts from other countries work out common standards before coming back home to work on them through domestic approval processes. There have been previous rounds of Basel capital rules, and the bank lobby predicted the same scary things as it is now.
In June 2010, the Institute of International Finance, a lobby group for the biggest global banks, promised catastrophe if that round of capital requirements came to pass: higher interest rates, less lending, and a 0.6 percentage point hit to GDP growth in the United States alone.
So what happened after the bankers predicted terrible things as regulators phased in higher capital requirements? They began in 2010, and careful analysis after the fact concluded that none of the scary things banks warned about came to pass.
“Contrary to the predictions of the private-sector doomsayers, as banks were increasing their capital levels … bank credit to the non-financial private sector was rising,” Stephen Cechetti, a professor at Brandeis University wrote in a widely cited 2014 paper entitled “Higher capital requirements: The jury is in.”
Instead, as Cechetti showed, higher capital levels proved to be good for lending. Robust capital bases let banks lend without fear for the future. And they help guard against a bank collapse that – in addition to being a catastrophe for small business and other borrowers – would leave taxpayers on the hook.
Capital is the name given to the equity, the net worth of a bank: assets minus liabilities. Because the failure of banks has wider harms than the failure of a single company, regulators insist banks have a cushion to absorb losses. Banks raise capital either by issuing new shares of stock (equity) or by retaining earnings that would otherwise go to dividends and buybacks. Banks don’t like either option because they exert downward pressure on share prices, which are often also linked to executive bonuses.
Capital levels have nothing to do with whether banks can lend or not – the “nonsense” that Admati has long criticized “You’re talking about where the money comes from, not what they can do with it,” she said. “More capital does not constrain what they do. It just makes what they do safer for the rest of us.”
American banks could very easily raise their current capital levels by simply retaining earnings, which are plentiful right now. JPMorgan Chase, Wells Fargo, Bank of America and Citigroup reported about $30 billion in profit in the third quarter of 2023. Those four banks alone made 45 percent of the profit harvested by the nation’s 4,400 banks.
So beware of bank lobbyists arguing that higher capital levels will lead to less lending and lower economic growth. They’ve said it before. They are saying it now. They will surely say it again in the future. That definitely does not make it true.