In the current discourse over large bank capital requirements, people across the country have been largely and rightly focused on the tradeoffs between regulation and economic impacts.

However, a pernicious argument or two often seeps into public policy debates that distracts us from the real issue, and we encountered one this past week. It goes like this: If capital requirements for the nation’s largest banks are increased, banks could simply shrink their dividends or share buybacks to maintain their lending activity without impacts on pricing. Surprisingly, one regulator recently was quoted as suggesting that banks’ capital distributions policies should change under various capital proposals. That view, if reported accurately, seems totally inconsistent with fundamentals of corporate finance, economics, and bank supervision.

Bank regulatory capital policy is about risk, safety, and soundness. Nothing else. It has zero to do with whether banks are profitable or whether firms choose to exchange shares for cash – a trade that results in zero change in the overall value of the bank. Historically, regulators have welcomed private capital and profitability at American banks, which are essential to the functioning of the U.S. economy. It’s unclear why that should change.

A Proposal With a $100 billion Annual Price Tag

Despite clear evidence of the strength of our largest banks, the agencies are proposing an increase in capital requirements of 30 percent. These same institutions have more than tripled their high-quality capital and undergone annual government-run stress tests, passage of which is necessary before proceeding with dividend and share repurchase plans.

Any material increase in required capital would affect the cost and availability of credit and other vital services. Economists agree that increasing bank capital requirements increases the cost of bank lending and depresses economic activity. As we have discussed in previous posts, equity capital is an expensive form of finance, so requiring banks to use more of it raises costs in exactly the same way that requiring a more expensive grade of steel would increase the cost of building a car.

Based on a review of independent academic research, the Forum estimates that proposed increases in capital requirements would cost the economy over $100 billion per year. The Forum’s calculations are based on impact estimates from 13 separate research studies relating increased capital requirements to economic output.

Majority of Americans are Shareholders

Public companies across industry sectors routinely distribute portions of their earnings to investors; this is the manner by which American companies attract investment so they can grow, create jobs, and compete. Dividends and buybacks rightly benefit shareholders. And the share of Americans owning stocks has been steadily rising. In 2022, 58 eight percent of all U.S. households owned stocks, either directly or indirectly, up from 52 percent in 2016, according to the Federal Reserve.

Moreover, stock holdings are generally concentrated among households headed by a retiree and dependent on dividends to meet their financial needs. Therefore, money returned to shareholders recirculates throughout the economy. It is our banks’ responsibility to those teachers, first responders, veterans and small businesses who invest in them to always use capital in the most efficient way possible.

As Federal Reserve Chair Jerome Powell said:

“When a company buys back its shares or pays higher dividends, the resources do not disappear. Rather, they are redistributed to other uses in the economy. For instance, shareholders may decide to invest the windfall in another company, which may in turn make productivity-enhancing investments. Or they may decide to spend the windfall on goods and services that are produced by other companies, who may in turn hire new workers. In these ways, stock repurchases would also be likely to boost economic growth.”

 

The Basel III Endgame Proposal Would Harm Investors

It is important to remember that the capital proposal itself would harm the economy and the very people who rely upon their investments. The market-making capital requirements would increase costs and lead to smaller inventories and less liquid markets, raising costs for companies seeking investment capital and savers looking for a solid financial return on their capital.

A number of organizations in the investor community has weighed in on the proposal.

“The Proposed Rule could result in increased costs and lower returns for pension funds, ultimately harming plan participants, the ERISA Industry Committee told regulators.

“We have deep concerns about the effects of the proposal on pension plans and the participants they serve,” the American Benefits Council said.

California Public Employees’ Retirement System argued that Basel III Endgame would hurt their beneficiaries: “There are unintended consequences in the Proposal… The Proposal would punish CalPERS – and its two million beneficiaries – because it does not issue publicly traded debt securities. That error should be remedied.”

Conclusion

The debate on the Basel III Endgame should stay focused on why excessive new capital requirements are being considered, and how they would harm Americans across our economy. Shifting the discussion to irrelevant topics does nothing to further our understanding of the likely costs of proposed capital increases.