Community bankers received a double dose of good news this week with a letter from a bipartisan group of U.S. senators to financial regulators on too-big-to-fail and Basel III. The lawmakers called on regulators to help address the too-big-to-fail problem by advancing Basel III capital guidelines on large institutions while recognizing that a stricter capital regime is not necessary for community banks. It’s not the answer to community bankers’ prayers, but it’s a good start.
Sens. Bob Corker (R-Tenn.), Sherrod Brown (D-Ohio), Elizabeth Warren (D-Mass.), David Vitter (R-La.) and Susan Collins (R-Maine) wrote that strengthening capital requirements will help protect the public against financial instability and too-big-to-fail. “The Basel III capital standards were designed for large, internationally active banks, as was appropriate,” they wrote. “We urge you to complete work on capital standards for the largest banks before turning to the smaller institutions.”
Well, hallelujah, I couldn’t agree more. The tangible capital levels at the most systemically risky banks must fully reflect the risk embedded within their balance sheets. We would go further—much higher tangible capital levels should be required against the hundreds of billions of dollars of off-balance-sheet risk held at these institutions. Over-reliance on “risk-weighted assets” contributed to the financial collapse of these firms. As an example, several types of securitized mortgage-backed securities were judged to be almost riskless before the crisis, and we all know what happened there.
ICBA and community bankers nationwide have been screaming bloody murder about these issues because of the fundamental inequities and threats they pose to our financial system. While too-big-to-fail creates systemic risks and inhibits free market competition, imposing Basel III capital standards across the board would penalize community banks and Main Street communities for Wall Street’s sins. As I’ve written here before, if the federal banking regulators want to reduce the nation’s commercial banking system to a handful of banks, imposing Basel III on community banks is the way to do it.
So this bipartisan letter is a step in the right direction on both issues—toward targeting new capital guidelines on the largest financial firms to help remove their taxpayer-funded backstop. While they aren’t the end-all, be-all fix to our too-big-to-fail problem, stronger capital rules for the largest and most systemically risky financial firms will help remove this unfair competitive advantage over smaller institutions and protect the U.S. taxpayer.
In other words, increasing the megabanks’ capital requirements helps restore the line between private risk and socialized losses. Let’s hope that our banking regulators take heed of these senators’ warnings, which ICBA and community bankers have been raising for years. We must end too-big-to-fail today and restore a free market for tomorrow.
Finer Points 