The federal government’s new capital requirements on financial institutions could be “harmful” to the U.S. economy, CEOs of some of the largest banks in America told lawmakers on Capitol Hill.
Several Wall Street executives, including JPMorgan Chase CEO Jamie Dimon, warned the Senate Banking Committee on Dec. 6 that capital mandates and a suite of other rules and regulations considered by regulators could negatively affect lending and capital markets, leading to trouble in the broader economic landscape.
In the aftermath of the banking crisis earlier this year, the focus in Washington has been the Basel III Endgame (B3E) framework.
The proposal, which has been crafted for the last few years, would force banks to possess greater amounts of capital to shield themselves against possible losses. Analysts say that this initiative would represent a sea change in the banking industry.
Proponents argue that the reforms would bolster financial stability and ensure that the global banking system is resilient amid economic turmoil.
Some of the major changes include lowering risk-based capital requirements for banks with $100 billion or more of assets, diminishing the ability of companies to use internal models for calculating capital mandates, and forcing banks to have more capital for risks generated by trading activities and operations.
Sen. Sherrod Brown (D-Ohio), the chair of the Senate Banking Committee, railed against the industry’s lobbying efforts.
“Anyone who had any doubt whether Wall Street could be trusted to use its power responsibly need only to look at the current lobbying fight on this,” Mr. Brown said.
“You have even gone national: pouring money into ads for Sunday Night Football. It is a campaign waged by your lobbyists to prevent financial watchdogs from putting in place capital requirements to protect our banking system and our economy.”
Basel III Endgame Slammed
Critics present the case that the discussion surrounding Basel III 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 Mr. Dimon.The increase in capital requirements, the JPMorgan Chase head noted, would not have prevented the collapse of Silicon Valley Bank.
“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,” Mr. Dimon added. “Good regulations and good regulators are critical to maintain the strength of our banking system.”
The CEOs contended that the B3E capital rules 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,” Mr. 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.
Economists have been debating the effectiveness of even more stringent capital standards.
Jason Goldberg, the managing director at Barclays, told a Brookings Institution discussion on Dec. 5 that these rules act as a “buffer that separates the bank from insolvency.”
“It acts as a form of self-insurance to improve incentives and improve the incentives of bankers,” he said.
Bank Policy Institute (BPI) President and CEO Greg Baer noted during the discussion that B3E could result in more migration of financial activity into unregulated corners.
While endorsing the Federal Reserve’s holistic approach to aligning capital requirements with risk, Federal Reserve Chair Jerome Powell acknowledged in a congressional hearing in July that it is a “difficult balance” to achieve as they could weigh on growth.
“Congress and the American people rightly expect us to achieve an effective and efficient regulatory regime that keeps our financial system strong and protects our economy while imposing no more burden than is necessary,” Mr. Powell said.
But 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.
Cryptocurrency? ‘I’d Close It Down’
In addition to B3E, the Senate Banking Committee hearing delved into other topics, including cryptocurrency.Mr. Dimon advocated for the government to shut down cryptocurrency and Bitcoin because “the only true use case for it is criminals, drug traffickers, money laundering, tax avoidance.”
“If I was the government, I’d close it down,” he said.
The head of America’s largest and most profitable bank has been a longtime critic of crypto, referring to Bitcoin as “a hyped-up fraud” and comparing it to a “pet rock.”
Sen. Elizabeth Warren (D-Mass.) agreed with Mr. Dimon, urging lawmakers to act.
“When it comes to banking policy, I am not usually holding hands with the CEOs of multibillion-dollar banks, but this is a matter of national security. Terrorists, drug traffickers, and rogue nations should be barred from using crypto for their dangerous activities,” she said.
Bitcoin has moved on from last year’s dark winter and has been one of the top-performing assets in global financial markets in 2023, rallying 165 percent to above $44,000.
