ATR Response to Bloomberg Editorial re: Bank Capital Requirements

To the editor:

Re: The Bloomberg Editorial Board’s column “Risky Banks Are Regulators’ Fault” (September 19, 2024):

The article says the U.S. “economy requires strong banks, which means banks that can keep lending and serving their customers even if they suffer serious losses.” That is exactly what the U.S. already has. The Federal Reserve said as much when it published the most recent stress test results in June:

Despite the larger projected decline in capital ratios in this year’s stress test, banks would still be able to lend to households and business while remaining well above minimum capital requirements. In aggregate, banks would have over $600 billion in capital above their minimum requirements, based on the quarter in which the aggregate capital decline is the largest.

This year’s hypothetical stress test included all 31 U.S. banks with more than $100 billion in total consolidated assets. Bank reserves clearly have enough capital to continue lending in difficult times. The fallacy of imminent “bank fragility” as the editorial board puts it is inaccurate and pure histrionics.

The editorial board is also conflating the collapse of Silicon Valley Bank (SVB) with systemic bank instability. Tying SVB’s foibles to other banks with more than $100 billion in assets flies in the face of what Congress intended when it passed the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. The bill was signed into law to tailor bank regulation based on bank idiosyncrasies.

The federal banking regulators’ implementation of Basel III Endgame is an administrative pivot away from congressional intent in an attempt to apply duplicative and arbitrary requirements on banks’ capital ratios. It is duplicative because the Stress Capital Buffer (SCB), which is a U.S.-based metric determined by the annual stress tests, already accounts for “operational-risk events.” The proposed rule is arbitrary and capricious and thus violates the Administrative Procedure Act. For example, with virtually no explanation, the proposed rule discriminates against private companies by attaching a higher risk-weight compared to publicly traded companies. Additionally, arbitrary risk weights for securitizations and market trading activity will impact hundreds of billions of dollars of stocks and bonds—some of which are held in Americans’ retirement accounts, health savings accounts, and collective investment trusts.

The rule is also likely a violation of the major questions doctrine because it is economically and politically significant, and thus requires “clear congressional authorization” that does not currently exist.

Although Vice Chair Barr’s revised proposal has yet to be released, the snippets revealed to the public leave a lot to be desired. Instead of throwing a bone to Democrats by making individual tweaks to certain provisions of the proposed rule, regulators should stop and rethink why these rules are needed in the first place. But perhaps the real reason why these rules are being proposed is more about politics and optics. Complying with the Basel Committee on Banking Supervision appears to be more of a priority to U.S. banking regulators than strictly abiding by congressional intent. Fortunately, legislation has been introduced to resolve this problem.

Fearmongering and hysterics have no place in policymaking. The decisions made by regulators and Congress have real impacts on real people. Regulators need to perform a wholesale revaluation of the rulemaking process for bank capital requirements. If they do that, they may realize the new capital requirements are nothing but an exercise in futility.