Economists Say Financial System Risks More Bailouts, Big Banks Say Financial System Is Too Safe, Want Less Regulation

SHOT:

  • Bloomberg (Editorial), June 18“On average, the six largest banks have about $7 in equity for each $100 in assets. That’s less than half what economists at the Minneapolis Fed estimate they need to make bailouts acceptably unlikely.”

CHASER:

  • In responses to Questions for the Record from the House Financial Services Committee (see below) the biggest banks in the country argued for looser capital requirements because they worry too much capital will hold them back during the next financial crisis.

Reaction from Allied Progress Director, Derek Martin: ““To borrow from a rhetorical giant, noticing you’re dry on a rainy day is a terrible reason to get rid of your umbrella. There is wide consensus that Dodd-Frank was a major step towards a safer financial system, but ten years after the crisis the banks are forgetting what it feels like to get wet. With allies in the Trump Administration ready to re-open Wall Street’s casino, Americans should demand that lawmakers take our financial safety seriously. Getting rid of our regulatory umbrella now would leave us perilously unprepared for the next rainy day.”

BACKGROUND: 

When Asked What Financial Regulations Could Worsen The Next Crisis, Morgan Stanley’s CEO Said Increased Requirements For Bank Liquidity (Cash) Could Restrict The Bank From Lending Under Higher Demand For… Liquidity.

Morgan Stanley Claims Capital Requirements Could Have a “Negative Effect” During A Downturn By Restricting Banks Ability To Lend, But Capital Requirements Were Put In Place To Help Banks Absorb Losses During An Economic Downturn.

Rep. Andy Barr (R-KY) Asked Morgan Stanley What Regulation The Bank Believes Would “Exacerbate An Economic Downturn.” Representative Andy Barr (R-KY) asked Morgan Stanley, “What is one regulation, either implemented or proposed, that your institution is subject to, that you believe could potentially exacerbate an economic downturn or may impede recovery from a downturn?” [Morgan Stanley Responses to HFSC Questions for the Record, pg. 13, 04/10/19]

Morgan Stanley Singled Out Capital Requirements, Or “Requirements That Banks Hold Large Stocks Of Liquid Resources.” Morgan Stanley CEO James Gorman answered, “As the post-crisis reform efforts have not yet been tested in an economic downturn, it is difficult to know how these regulations would affect the banking sector in a downturn. The combination of liquidity and capital markets regulations could have negative effects in a downturn, as the economy slows and the demand for liquidity rises. For example, requirements that banks hold large stocks of liquid resources on their balance sheets may restrict Morgan Stanley’s ability to lend in the event of an increased demand for liquidity.” [Morgan Stanley Responses to HFSC Questions for the Record, pg. 13, 04/10/19]

 

Capital Requirements Were Put In Place To Act As A Buffer For Banks To Absorb Losses In The Event Of Another Crisis. “Still, there is a general consensus among academics that capital requirements, which Dodd-Frank toughened, are a key tool for lessening the potential damage of a financial crisis. Capital requirements set the amount of assets a bank must set aside to provide a cushion in case of potential trouble. This liquidity is a buffer that absorbs losses, enabling banks to meet obligations including covering losses on investments or other unexpected cash outflows.” [Lisa Fu, “Is Dodd-Frank Crippling Banks or Saving Them?” Fortune.com, 08/04/17]

Bank Of America Said One Thing That Would Help Them Support “Market Liquidity” During A Financial Crisis Was To Weaken Requirements Put In Place To Ensure Banks Had Enough Liquidity… During A Financial Crisis.

Bank of America Said A Trump Treasury Department Plan To “Soften Bank Capital Requirements” and Let Banks Count Debt Holdings Towards Their Total Liquid Assets Would Help Financial Institutions “Support Market Liquidity” During An Economic Downturn.

Rep. Andy Barr (R-KY) Asked Bank of America What Regulation The Bank Believes Would “Exacerbate An Economic Downturn.” Representative Andy Barr (R-KY) asked Bank of America, “What is one regulation, either implemented or proposed, that your institution is subject to, that you believe could potentially exacerbate an economic downturn or may impede recovery from a downturn?” [Bank of America HFSC CEO Hearing Follow-Up Questions/Answers, Pg. 2]

In Their Response, Bank Of America Supported “Recalibration” Of Capital Reforms As Outlined In The “US Department Of Treasury Report On Banking.” “In part to address the very question at hand, the U.S. Department of Treasury report on banking recommended, in addition to greater transparency for stress testing, recalibration of several capital reforms applicable to global systemically important banks {G-SIBS), including the G-SIB surcharge, the total loss-absorbing capacity final rule, and the enhanced supplementary leverage ratio. The Treasury report also recommended delay and recalibration of potential forthcoming reforms such as the Net Stable Funding Ratio and Fundamental Review of the Trading Book. Tailored adjustments to these requirements would improve the ability of financial services institutions to support market liquidity, including during an economic downturn.” [Bank of America HFSC CEO Hearing Follow-Up Questions/Answers, Pg. 2]

  • The Treasury Report Bank Of America Refers To A Plan To Add “Multiple Exemptions To Nearly All Capital Rules.” “Treasury wants to make stress tests and supervision ‘more transparent,’ which is code for allowing banks to know when examiners will arrive and how to game the process. It also wants to reduce the frequency, with stress tests and living will plans every two years instead of annually. It wants to add multiple exemptions to nearly all capital rules and would blow enough holes in the Volcker rule (including allowing proprietary trading up to $1 billion) that its support for the idea in principle would not extend to practice.” [David Dayen, “The Real Threat To Wall Street Reform Is The Treasury Department, Not Congress,”The Intercept, 06/13/17]
  • That Same Treasury Report Advocated “[Softening] Bank Capital Requirements For [Securitized] Products” And For Allowing Banks To Count Tranches Of Debt Towards Their Total Liquid Assets. “The report seeks to soften bank capital requirements for securitised products, lowering some calculations in line with international recommendations. It also suggests the highest quality layers, or ‘tranches’, of debt should count towards banks’ liquid assets able to be sold in a crisis to raise cash, helping them meet another international regulatory requirement.” [Joe Rennison, Eric Platt and Gregory Meyer, “Five takeaways from the Treasury’s deregulation report,” Financial Times, 10/06/17]

Goldman Sachs Supports “Recalibrations” of The Post-Crisis Regulatory Framework, And Thinks Regulators Should “Simplify” Capital Requirements… But They Admit Those Very Reforms Have Made The US Financial System “Substantially Safer.”

Despite Admitting That Dodd-Frank And Other Post-Crisis Capital Requirements Made The Financial System “Substantially Safer And More Resilient Against Failure” ….

Rep. Andy Barr (R-KY) Asked Goldman Sachs What Regulation The Bank Believes Would “Exacerbate An Economic Downturn.” Congressman Andy Barr (R-KY) asked Goldman Sachs, “What is one regulation, either implemented or proposed, that your institution is subject to, that you believe could potentially exacerbate an economic downturn or may impede recovery from a downturn?” [Goldman Sachs Responses to HFSC Questions for the Records, Pg. 1, 04/10/18]

Goldman Sachs Admitted That Dodd-Frank And Other Post-Crisis Capital Requirements Have Made The Financial System “Substantially Safer And More Resilient Against Failure.” “As a result of the Dodd Frank Act, revisions to the Basel capital and liquidity standards and other market reforms, today the U.S. financial system is substantially safer and more resilient against failure or disruptions in critical services. Financial institutions have significantly more capital and usable total loss-absorbing capacity (TLAC). The largest financial institutions are more resolvable under stressed conditions without threatening the financial system or needing any government capital support.” [Goldman Sachs Responses to HFSC Questions for the Records, Pg. 1, 04/10/18]

Goldman Sachs Called For “Recalibrations” Of Post-Crisis Regulations, Arguing That Regulators Should “Simplify” Capital Requirements As Part Of A “Holistic Review.”

Goldman Sachs Called For “Reassessments And Recalibrations Of The Post-Crisis Regulatory Regime,” Complaining That Bank Regulators Haven’t “Comprehensively Assessed How Their Post-Crisis Regulations Interact With One Another.” “We believe that some reassessments and recalibrations of the post-crisis regulatory regime would be sensible now that we are 10 years since the crisis. The U.S. prudential agencies have not comprehensively assessed how their post-crisis regulations interact with one another, or what their aggregate impact is not just on the safety and soundness of individual institutions, but on the liquidity of capital markets, lending activity, and overall economic growth, all of which can affect the financial stability of the United States.” [Goldman Sachs Responses to HFSC Questions for the Records, Pg. 1, 04/10/18]

Goldman Sachs Argued That It “Might Make Sense” For Regulators To “Simplify” The Capital Requirements To Which The Bank Is Subject. “And at a time when the Federal Reserve has acknowledged that large bank capital levels are ‘about right’ and that it might make sense to simplify the no less than 24 separate capital-related requirements to which large banks are subject, the capital framework will undergo yet more material changes in the next two years.” [Goldman Sachs Responses to HFSC Questions for the Records, Pg. 1, 04/10/18]

Goldman Sachs Called For A “Holistic Review” Of “Capital And Liquidity Requirements” Before The “Introduction Of Any New Regulations.” “It is important to consider banks’ capital and liquidity requirements within the context of the other reforms that have improved the stability of the financial system, such as leverage requirements, margin and clearing rules, living will requirements and long-term debt requirements. We believe that a holistic review of the cumulative impact of existing and forthcoming rules is warranted before introduction of any new regulations.” [Goldman Sachs Responses to HFSC Questions for the Records, Pg. 1, 04/10/18]

Citi Thinks Capital Requirements Implemented In Response To The Last Financial Crisis May “Unduly Restrict The Banking Sector’s Ability To Lend In A Downturn.”

Citi Has Claimed That Post-Crisis Capital Rules Could Worsen An Economic Downturn And “Unduly Restrict” Banks As It Called For Regulators To “Reassess” The Requirements.

Rep. Andy Barr (R-KY) Asked Citi What Regulation The Bank Believes Would “Exacerbate An Economic Downturn.” Congressman Andy Barr (R-KY) asked Citi, “What is one regulation, either implemented or proposed, that your institution is subject to, that you believe could potentially exacerbate an economic downturn or may impede recovery from a downturn?” [Citi Responses to HFSC Questions for the Record, Pg. 5]

Citi Cited “Industry And Trade Association Letters” In Arguing That Regulators Should “Reassess” Post-Crisis Capital Requirements In Order “To Address Unintended Consequences.” “We believe that post-crisis regulatory reforms have improved the overall resilience of the U.S. financial system through robust capital and liquidity standards and enhanced recovery and resolution planning. With that said, these reforms have yet to be tested in the context of an economic downturn. As has been noted in industry and trade association comment letters, it is important to reassess these reforms in view of the material changes in the financial system since these reforms were introduced, to address unintended consequences of these standards, and to mitigate identified issues in the current framework.” [Citi Responses to HFSC Questions for the Record, Pg. 5]

Citi Complained That Liquidity Regulations May “Unduly Restrict The Banking Sector’s Ability To Lend In A Downturn.” “As an example, liquidity regulations that have resulted in banks holding large stocks of liquid assets on balance sheet may unduly restrict the banking sector’s ability to lend in a downturn as liquid resources come under pressure.” [Citi Responses to HFSC Questions for the Record, Pg. 5]

JPMorgan Chase Believes It Should be Trusted To Play It Safe With Lowered Capital Requirements, Which “Limit The Amount Of Capital That Can Be Distributed To Shareholders.”

After The Federal Reserve And FDIC Proposed “Weakening The Supplementary Leverage Ratio” For Banks, JPMorgan Chase CEO Jamie Dimon Was Asked Why His Bank Should Be Required To Hold $34 Billion Less In Capital Just 10 Years After It Was Bailed Out By Taxpayers. “Mr. Dimon, the Fed and OCC have proposed weakening the supplementary leverage ratio by approximately $121 billion, according to the FDIC, for lead depository subsidiaries compared to the current eSLR standard. JPMorgan Chase benefits the most by this proposal, which would reduce your depository institution’s tier 1 capital by more than 20 percent, or $34 billion, according to the FDIC. That is a larger reduction than the $25 billion your bank received in financial crisis bailout funds. Why should your bank reduce capital by 20 percent? Is that good for taxpayers who bailed your bank out and the rest of the industry 10 years ago?” [JPMorgan Chase Responses to HFSC Questions for the Record, Pg. 43, 06/10/19]

  • The “Supplementary Leverage Ratio” Was Referred To As A Capital Requirement By The Federal Reserve, FDIC, And OCC. “The federal bank regulatory agencies […] requested comment on a proposal to modify a capital requirement for U.S. banking organizations predominantly engaged in custodial activities, as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).” [Press Release, Board of Governors of the Federal Reserve System, 04/18/19]

JPMorgan Said The Lowered Capital Requirements “Would Not Materially Change The Capital Position Of The Company Nor The Way In Which The Firm Does Business” And That Essentially, The Public Can Trust Them To Remain Well Capitalized On Their Own.“While the Federal Deposit Insurance Corporation analysis is factually accurate, it can be a bit misleading. This change would not materially change how JPMorgan Chase would manage its capital at the aggregate firm level. […] With respect to the bank itself, the entity is well capitalized relative to all of the regulatory minimums. Although the proposed change would decrease the firm’s requirement at the standalone bank level, it would not materially change the capital position of the company nor the way in which the firm does business; it would, however, better ensure that the SLR fulfills its intended purpose as a backstop to risk-based capital requirements.” [JPMorgan Chase Responses to HFSC Questions for the Record, Pg. 43-44, 06/10/19]

JPMorgan Also Complained That “Regulatory Minimum Ratios In Rules Set By The Banking Regulators, “Coupled With Other Regulations In The Post-Crisis Framework, “Practically Limits The Amount Of Capital That Can Be Distributed To Shareholders.” “In the current capital framework, the firm’s capital planning is governed by a combination of (1) management and board objectives, (2) regulatory minimum ratios in rules set by the banking regulators, and (3) the annual CCAR process. This combination practically limits the amount of capital that can be distributed to shareholders.” [JPMorgan Chase Responses to HFSC Questions for the Record, Pg. 43-44, 06/10/19]

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