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Top executives from major U.S. banks conveyed concerns to lawmakers on Capitol Hill regarding the potential adverse impact of the federal government’s new capital requirements on financial institutions.
During a hearing before the Senate Banking Committee on December 6, prominent figures from Wall Street, including JPMorgan Chase CEO Jamie Dimon, highlighted their apprehensions about the proposed capital mandates and a comprehensive set of regulations being considered by regulators. The executives emphasized that these measures could have detrimental effects on lending activities and capital markets, thereby posing risks to the broader economic landscape.
Basel III Endgame
The regulatory focus in Washington, particularly in the aftermath of this year’s banking crisis, has centered on the Basel III Endgame (B3E) framework. Crafted over the past few years, this proposal seeks to compel banks to maintain higher levels of capital as a safeguard against potential losses. Industry analysts view this initiative as a significant transformation within the banking sector.
Key elements of the proposed changes include the reduction of risk capital requirements for banks with assets exceeding $100 billion, limitations on the use of internal models for calculating capital mandates, and an increased capital requirement for risks associated with trading activities and operations.
Senator Sherrod Brown, Chair of the Senate Banking Committee, strongly criticized the industry’s lobbying efforts during the hearing. He expressed skepticism about Wall Street’s responsible use of power, particularly in the context of the ongoing lobbying campaign against the implementation of capital requirements aimed at safeguarding the banking system and the overall economy. Senator Brown highlighted the industry’s national level lobbying efforts, including substantial financial contributions for advertisements during Sunday Night Football, as evidence of a concerted campaign to disrupt financial watchdogs from establishing crucial capital safeguards.
B3E Pros and Cons
Critics present the case that the discussion surrounding B3E and similar initiatives is not about more or less regulation “but about the right regulation to keep the American banking system the best in the world,” stated Dimon.
“The rule would have predictable and harmful outcomes in the economy, markets, businesses of all sizes, and American households,” he said. “I urge lawmakers and regulators to be thoughtful about the effect of arbitrary and unstudied regulatory proposals and their impact on the economy,” Dimon added. “Good regulations and good regulators are critical to maintain the strength of our banking system.”
The CEOs believe that the B3E capital rules are detrimental, and would harm everything from clean energy projects to pension funds.
“It would quadruple our capital requirements for clean energy tax equity projects and would increase our capital eight times for important transactions that we enter into with pension funds to improve their returns for retirees,” said David Solomon, the CEO of Goldman Sachs.
Jane Fraser, the CEO of Citigroup, warned that the fresh regulations would make borrowing and a range of financial activities “more expensive, especially for small businesses and consumers.”
In the end, because B3E “will make services so uneconomical,” Dimon said, “many banks would cease providing certain products and services. Those that do will have to charge more for them just to make it worth the service,” he added.
Who is B3E Really Helping?
Economists have engaged in extensive debate regarding the efficacy of heightened capital standards. Jason Goldberg, Managing Director at Barclays, emphasized during a Brookings Institution discussion on December 5 that such regulations function as a protective barrier for banks, preventing their potential collapse. He characterized these standards as a form of self-insurance, aiming to enhance incentives for bankers.
Greg Baer, President and CEO of the Bank Policy Institute, expressed concerns during the same discussion about the possibility of increased financial activity migrating towards unregulated sectors in regard to these standards.
While endorsing the Federal Reserve’s comprehensive strategy aligning capital requirements with risk, Federal Reserve Chair Jerome Powell acknowledged the challenge of striking a delicate balance. Powell recognized the potential impact of stringent standards on economic growth.
In addressing these concerns, Powell emphasized the Federal Reserve’s commitment to achieving a regulatory framework that is both effective and efficient. He highlighted the delicate task of maintaining a robust financial system and protecting the economy while minimizing regulatory burdens, as expected by Congress and the American people
Some wonder if these measures are superfluous, pointing to administration officials and financial regulators insisting that the banking system is safe, sound, resilient, and highly liquid. This year, five U.S. banks failed: Silicon Valley Bank, Signature Bank, First Republic Bank, Citizens Bank, and Heartland Tri-State Bank. Stricter capital requirements were needed to protect the bank system from another catastrophic meltdown.
In considering your financial choices, it is imperative to evaluate the reliability of traditional banking systems. The utilization of outdated strategies by these institutions raises concerns about their stability. Perhaps it is wise for individuals to proactively manage their financial destinies, stepping away from reliance on a government that primarily prioritizes self-interest. Precious metals, such as gold and silver, serve as a hedge against inflation during such economic uncertainties.
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