CONTACT: Barbara Hagenbaugh
(202) 471-0436
bhagenbaugh@fsforum.com
Capital isn’t free and the costs to the economy are nearly instantaneous
Washington, D.C. – Financial Services Forum President and CEO Kevin Fromer issued the following statement today regarding capital requirements and the largest U.S. banks:
“As the chairman of the Federal Reserve has indicated, capital levels in the U.S. banking system are strong, particularly at the eight U.S.-based global systemically important banks. Furthermore, higher capital levels need to be justified because of the tradeoffs.
“The largest banks are already more than amply capitalized and have used their strength to support both the banking system and the overall economy during periods of stress. Raising capital requirements further will simply hurt consumers and businesses at a very uncertain time for our economy.
“Some are arguing that these costs to the economy will not be felt for some time because capital requirements are often ‘phased in’ over a number of years. Yet as Federal Reserve research has shown, costs are nearly instantaneous because financial market participants respond to new information about regulatory changes as soon as they are announced. As a result, banks act to come into compliance with new rules in a matter of months following announced policy changes. The costs, therefore, are borne in full shortly after being announced.
“Finally, it is important to note that as a result of the Collins floor, the impact of internal models on large bank capital has been limited in the United States for a number of years. We acknowledge the goal of Basel 3 Finalization to limit the use of internal models internationally, but that is largely not an issue for the largest U.S. banks and should not be used as a pretext to raise capital requirements on already well-capitalized banks.”
Background:
Capital acts as a financial cushion to absorb losses. Since 2009, Forum members have more than tripled their common equity tier 1 capital, the highest quality of regulatory capital, to $899 billion. Capital requirements for the largest U.S. banks have continued to increase each year and are higher than that required of foreign banks around the globe.
At the same time, the largest banks have supported the economy and the financial sector, including through the challenging periods such as the pandemic and the recent banking turmoil. The largest U.S. banks provide more than one-third of lending by banks to businesses and households in the country and hold $53 billion in business loans less than $100,000, representing more than one-third of all such loans by banks to small businesses.
Learn More:
- To learn more about large bank capital – what it is, why it is important, and why it is essential to get the calibration right – watch our “Policy Cents” video, Large Bank Capital and the Economy.
- To read about what U.S. bank regulators have said about capital in the largest banks, view What They’re Saying.
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The Financial Services Forum is an economic policy and advocacy organization whose members are the chief executive officers of the eight largest and most diversified financial institutions headquartered in the United States. Forum member institutions are a leading source of lending and investment in the United States and serve millions of consumers, businesses, investors, and communities throughout the country. The Forum promotes policies that support savings and investment, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.