Hare you Have you noticed that US bankers are furious about the proposed new capital rules? What did it give away? Perhaps it was the ads warning of dire consequences for the economy, which can be heard during primetime spots at Sunday night football games. Maybe it was the completely veiled threats from executives. Suing your regulator is “never a preferred option,” JPMorgan Chase’s Jeremy Barnum told investors on a recent earnings call, but “it can’t be taken off the table.” Or perhaps it was the flood of letters recently arriving in the mailboxes of the Federal Reserve and other banking agencies.
The U.S. process for creating new banking rules has many phases. Regulators publish their agendas in the Federal Register, a sparkling magazine published every weekday that details plans for rules, proposed rules, final rules, and so on. They talk to industry peers and conduct impact analyses. Back and forth between the industry and the regulator at this stage happens over a cup of coffee, often in private rooms in federal buildings. Then a ‘Notice of Proposed Rulemaking’ is published, the ‘comment period’ begins, interested parties submit letters to regulators – and the battle becomes public.
The process is normally quite technical. Far from being proposals on the implementation of Basel III, known as the “Basel III endgame,” which were first published in July. It seems that the bosses of big banks have been personally offended by them. Perhaps their thought process goes like this: Are we really so incompetent at managing risk that system-wide capital levels need to be increased by 16%? After complaints piled up, the comment period was extended from November 30 to January 16.
Now that all the complaints have been filed and letters published, the extent of the opposition is clear. Latham & Watkins, a law firm, found that while 347 submissions disagreed with the rules in whole or in part, only nine supported them as proposed. A wide range of groups found errors. It is difficult to imagine another cause that would unite BlackRock and Goldman Sachs with the National Association for the Advancement of Colored People, environmentalists, real estate agents and most sitting senators.
The rules are long and complicated, just like the complaints. But they boil down to three themes. Firstly, a large capital increase is not necessary. Second, the rules will hamper banks’ ability to act as intermediaries in the capital markets. Third, they will crush lending to key parts of the economy, such as housing and environmental projects (especially those favored by President Joe Biden’s Inflation Reduction Act).
Last year, bank bosses seemed resigned to their fate. Marianne Lake of JPMorgan described the proposals as “a bit like being a hostage”. The requirement was initially so shocking that “even if it changes a little bit, you’re kind of grateful for that, but it’s probably still going to be high.” They now seem more confident that the rules will be changed. ‘I don’t think anyone [thinks] that this will proceed as proposed,” Denis Coleman of Goldman Sachs said on January 16.
Fed governors typically try to reach agreements on regulatory issues. This time, however, they are divided, with Michelle Bowman and Christopher Waller, two Donald Trump appointees, opposing the rules when they were first proposed. On Jan. 16, Mr. Waller told the Brookings Institute, a think tank, that it “might even be best to just pull it back” and start over. On Jan. 17, Ms. Bowman told the Chamber of Commerce, a lobbying group, that agencies needed to make “substantial changes” to the rules. Even Jerome Powell, the Fed chairman, has expressed reservations.
Capital punishment
There are three ways things can go. Regulators could go ahead undeterred and finalize the rules. This would almost certainly result in the lawsuit Mr. Barnum referred to. Any legal action would focus on procedural issues; bank lobbyists allege agencies have violated laws that require data and analysis behind proposals to be made available to the public. (Banks claim this was not the case; the agencies have not yet responded.)
The other two options are equally unpalatable: Agencies could make more substantive changes to the rules, or they could withdraw them and start over. Either approach would require a repetition of the proposal-and-comment cycle.
A difficult situation is made even more difficult by the fact that agencies are starting to run out of time. The Congressional Review Act allows an incoming Congress to reject any rule finalized less than 60 legislative days before it takes office. Given the upcoming presidential elections and the time off for the summer recess, that deadline is closer than it seems. It will fall in July. If the rules are not finalized quickly and Mr. Trump, who weakened capital requirements for banks during his last term in office, wins the November election, it seems likely that extra-stringent standards will be thrown out entirely.
Bankers therefore have every reason to postpone the time when the rules could be finally adopted. Will that affect their politics? Bank bosses are generally not major political donors. According to data collected by Open Secrets, a nonprofit organization, neither Jamie Dimon of JPMorgan nor David Solomon of Goldman Sachs have given money during this presidential campaign. There appears to have been no swing to the right among the younger staff. If anything, donations from people employed by JPMorgan, Citigroup and Bank of America favor Democrats by a larger margin than in 2020. Perhaps some things are more important than capital requirements – and that’s not what you’d get from listening to bank ads. ■
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