On September 19, the House Financial Services Committee Subcommittee on Financial Institutions and Monetary Policy held a hearing titled “A Holistic Review of Regulators: Regulatory Overreach and Economic Consequences.” Witnesses in the hearing were:
- Mr. Hal Scott, Nomura Professor of International Financial Systems, Emeritus, Harvard Law School
- Ms. Karen Petrou, Managing Partner, Federal Financial Analytics Inc.
- Ms. Margaret E. Tahyar, Partner, Davis Polk & Wardwell LLP
- Ms. Mayra Rodríguez Valladares, Managing Principal, MRV Associates
Below are some high-level takeaways on some of the key issues covered in the hearing prepared by Delta Strategy Group.
Subcommittee Chairman Andy Barr (R-KY)
The latest Basel proposal is incorrectly pushed as a response to banking instability and has been delivered in an underdeveloped and hurried fashion. In many crucial areas, the proposal is glaringly arbitrary and capricious. The Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) left Congress out of the flow of information, and we have no indication of how all the released proposals work together in terms of their cost-benefit analysis.
Subcommittee Ranking Member Bill Foster (D-IL)
Having more thorough cost-benefit analysis in rulemakings would allow for more informed discussions. Our experience over the last decade has shown that asking a bank to manage its risk through increased capital requirements has real benefits throughout the economy.
Committee Ranking Member Maxine Waters (D-CA)
Instead of marking up bipartisan bills with support on both sides, Republicans are holding another hearing to attack the Fed, FDIC, and OCC. Republicans are not focused on how regulation will impact consumers, and instead are focused on how it will impact Wall Street. Regulators should strengthen, not weaken these critical banking rules.
Mr. Hal Scott, Nomura Professor of International Financial Systems, Emeritus, Harvard Law School
There is no need for a capital increase to maintain the stability of the banking system, as U.S. bank capital levels are strong. There would be significant economic costs from raising bank capital requirements, as there is extensive empirical evidence that increasing capital requirements reduces banks’ lending and capital markets activities and increases borrowing costs for businesses and consumers, slowing economic growth. Raising bank capital requirements at this time could reduce the precision of the Fed’s monetary policy and thereby interfere with the Fed’s ongoing efforts to fight inflation.
In their cost-benefit analysis on the multiple proposed rules, the SEC focuses on the cost to institutions, but that is a small part of what we should be worried about. They do not consider how these proposals impact the economy as a whole. The cost-benefit analysis of the SEC’s rules is woeful. Out of the forty-seven proposed rules Chairman Gensler has issued, only eight are mandated by statute.
Ms. Karen Petrou, Managing Partner, Federal Financial Analytics Inc.
New, bank-centric capital and resolution proposals have not been constructed with the broader capital markets in mind. The most important criterion by which to judge financial policy is not bank profitability. Banks play a critical role as vital conduits of equitable growth and macroeconomic security and policy must be calibrated not just to maximize a singular goal such as fortress banking, but also to optimize financial stability.
Ms. Margaret E. Tahyar, Partner, Davis Polk & Wardwell LLP
The future role and structure of the American banking and financial sector is at stake. It is reasonable and wise to implement changes to the regulatory and supervisory framework in light of lessons learned from the bank failures and market turmoil in March of this year. These changes should be based on empirical data and carefully considered. It seems odd that we would hobble Global Systemically Important Banks at this time. The banking issues in March were of liquidity, not primarily in capital.
Ms. Mayra Rodríguez Valladares, Managing Principal, MRV Associates
In addition to operational and financial risks, banks now also face cybersecurity, climate change, rising civil unrest domestically and geopolitical threats. Unfortunately, those risks are barely covered by existing or proposed rules. Banks are not at historically high levels of capital. By updating changes to Basel III and Dodd Frank, U.S. bank regulators are fulfilling their mission of ensuring the safety and soundness of the American banking system. Large banks can meet the updated capital and bank resolution requirements in addition to issuing equity and subordinated debt and reducing dividend payouts and share buybacks.