Recently, the Federal Reserve, FDIC, and the Office of the Comptroller of the Currency issued a proposal to substantially increase capital requirements for large U.S. banks. While there are many aspects of the proposal that are notable and will receive considerable attention over the coming months, one exceptionally notable aspect is the significant lack of consensus among voting principals at the regulatory agencies. At both the Federal Reserve and the FDIC there were two dissenting votes on the proposal. Further, while Federal Reserve Board Chair Jerome Powell voted for the proposal, his statement made clear that he has a number of open and unresolved questions about the necessity and costs of significantly higher capital requirements.
The last time the banking sector saw such a significant increase in capital requirements was when Basel III was implemented in response to the financial crisis. Unlike the recent proposal, however, Basel III had unanimous support from agency principals. A capital hike of this magnitude would have substantial economic costs. As we have discussed in prior posts, independent research suggests that a capital increase of this magnitude could cost the U.S. economy as much as $ 1 trillion over the next thirty years.
As Chair Powell stated, “raising capital requirements also increases the cost of, and reduces access to, credit.”
The recent capital proposal is exceedingly lengthy and complex, coming in at over 1,000 pages, and, if implemented as written, could increase capital requirements by 20 percent or more. But despite the serious potential harm, regulators have made clear that they have yet to rigorously study the impact of the proposal on the banking sector and the broader economy. Clearly, a capital proposal of this size, complexity, and significance must be subjected to a rigorous and transparent cost-benefit analysis. A failure to rigorously examine the impacts of this proposal would be unacceptable given the stakes for our economy.
To improve transparency, promote discussion and more generally demystify this complex and significant proposal, we are launching a blog series – Capital Insights – to identify and shed light on some of the most problematic and costly aspects of this proposal. The series will extensively, though efficiently, analyze key aspects of the proposal. Each blog will be focused on a single aspect of the capital proposal, the related costs, and the overall impact on the economy. Our inaugural blog in this new series will focus on the impact of the capital proposal on small businesses. Small businesses are crucial to the vibrancy of our economy and, unfortunately, this capital proposal would result in significant and unnecessary costs for small businesses that would place a drag on the economy. We will also address other key issues in the series including the impact on the ability of large companies to make needed investments, the ability of businesses to manage risks, and the impact on the competitiveness of U.S. banks.
The recently released capital proposal has the potential to dramatically and negatively impact our banking industry and the economy. We look forward to bringing the proposal, and its consequences, into full view so that policymakers and the public better understand what it could mean for American families, businesses and future competitiveness.