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Opinion | More Regulation? Big Banks Say They’re Safe Enough Already.


Making banks safer would seem like an easy thing for Americans to agree on, especially after the wipeouts of the global financial crisis in 2007-09, followed by the failure last year of three big ones: Silicon Valley Bank, Signature Bank and First Republic Bank.

But no. A wide-ranging lobbying campaign by the nation’s biggest banks and their allies seems to be succeeding in beating back a proposal put forward last year by three federal agencies (the Federal Reserve, the Comptroller of the Currency and the Federal Deposit Insurance Corp.) to require shareholders of big banks to put more of their own skin in the game — so that if things go bad the banks won’t have to drastically cut lending or turn to taxpayers for a bailout.

“Candidly, my expectation is that there’s going to be a fairly significant softening of the capital proposal,” Keegan Ferguson, a director on the financial services team of Capstone, an advisory firm, told me.

The backsliding appalls a lot of economists, among them Anat Admati, a professor of finance and economics at Stanford’s Graduate School of Business. Admati is a co-author with Martin Hellwig, a German economist, of a 2013 book on pretty much exactly this topic, “The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It.” (An updated edition of the book just came out.)

“It just sickens me,” Admati told me last week. “It doesn’t have an economic rationale, beginning to end.”

You might expect that a fight over banks’ power and privilege would have liberals agitating for reining them in and conservatives defending them. But that’s not how it’s playing out. A lot of liberals are siding with the banks on the theory that forcing them to become safer will reduce their ability to lend to minority home buyers or renewable-energy ventures or other worthy borrowers.

The group supporting the agencies’ proposal is dominated by scholars of banking and finance from across the political spectrum. Among the signatories to a 2010 letter urging that banks be made to reduce their dependence on borrowing was Eugene Fama, a Nobel laureate and self-described extreme libertarian who is a professor at the University of Chicago Booth School of Business. On the other end, among the 30 signers of a letter this year supporting the tougher rules is Saule Omarova, a professor at Cornell Law School, who in 2021 was prevented from becoming comptroller of the currency by Republicans who thought she was too liberal.

The scholars argue that far from crimping lending, the new rules will give big banks the financial strength to keep making loans even when times are tough. Unfortunately, banks tend to amplify the ups and downs of the business cycle: They lend heavily and sometimes unwisely when times are good and then cut back when there’s a downturn — which of course is right when consumers and businesses really need their money.

Comment letters bashing the interagency proposal heavily outnumbered those supporting it. Critics of the agencies’ plan include Business Roundtable, the National Association of Manufacturers, the N.A.A.C.P., the mayor of Toomsboro, Ga., and Cara Frank, the founder of Six Fishes Acupuncture in Philadelphia.

In their proposal last July, the three bank regulators estimated that to comply, large banks would need to increase their core safety cushions by about 16 percent on average. That safety cushion is called common equity Tier 1, but just think of it as ordinary shares. The reason shares are safer than debt is that if a bank gets in trouble it can stanch the bleeding by stopping payment of dividends on the shares. In contrast, it can’t stop paying interest on its debt or deposits.

The dispute boils down to how much banks should be allowed to borrow — and that includes taking deposits, since a deposit is effectively a loan to the bank. For a bank to be solvent, the value of its assets, such as the interest-earning loans it makes, needs to be greater than its liabilities, such as the money it owes to depositors and other lenders. A bank that’s solvent could, if necessary, pay off all its liabilities tomorrow and still have some assets left over.

Solvency is not to be taken for granted. When the Federal Reserve jacked up interest rates, low-earning assets on banks’ balance sheets lost so much value that hundreds to thousands of regional banks would have been insolvent if they’d had to sell at current prices last year, according to a working paper released in December.

The big banks and their supporters argue that a 16 percent increase in their safety cushion is unnecessary, and that the banks are already safe because of regulatory changes made after the 2007-09 financial crisis. They accuse the regulators of “gold-plating” the rules and putting U.S. banks at a disadvantage by going beyond the international standard called Basel III (after the Swiss city of Basel, headquarters of the Bank for International Settlements, a convening point for central bankers).

Francisco Covas, an executive vice president and the head of research at the Bank Policy Institute, which represents the largest banks, referred me to a study he co-wrote last year that said current levels of capital at large banks are actually toward the upper end of recent academic estimates of what’s socially optimal.

The banks also say the government plan is half-baked. In October, three months after issuing its proposal, the Federal Reserve announced that it had begun collecting data on how the plan would affect the banks. “That really shows that the proposal was put forward in a way that wasn’t informed by the data,” Hugh Carney, the executive vice president for financial institution policy and regulatory affairs at the American Bankers Association, told me.

This stuff gets weedy fast, so I’m going to skip the details of the bankers’ arguments and go to the responses by Admati and Hellwig, who is the director emeritus of the Max Planck Institute for Research on Collective Goods in Bonn, Germany. (Admati has become a friend of mine, but she’s a prominent voice on this subject.)

In an email, Hellwig said the benefit-cost studies cited by the bankers don’t appear to take account of the benefits to banks from the too-big-to-fail implicit protections they have. He also wrote that increased economic output from more lending is not a reliable measure of banks’ value. Some lending is wasteful, he wrote. (Case in point: the subprime lending boom of the 2000s, in which “money washed through the economy like water rushing through a broken dam,” according to the Financial Crisis Inquiry Report.)

Covas responded that academic research shows that there is no too-big-to-fail implicit subsidy: “Due to post-crisis regulations, large banks in the United States do not benefit from a lower cost of funding resulting from a perception that they are too big to fail.” He also wrote that the academic studies he reviewed assumed banks distribute capital to shareholders if they don’t have projects worth lending to.

Admati said there’s no justification for banks to be as indebted as the rules currently allow. As to the argument that banks are special, she said, “Banks are special in the harms they cause and the privilege they have.”

Here is a 90-page submission that Admati made to the Fed on the last day for comments. It includes her and Hellwig’s debunking of what they call “44 flawed claims” about banking regulation.

I asked Admati why so many individuals and organizations are lining up on the banks’ side of the debate. “Everybody wants banks as friends,” she said. “They just have raw power because they control money.” More people should be in favor of the regulators’ plan to make banks safer, she said, “but they don’t know it. They don’t understand how they’re being harmed.”


”Even if growth continues to hold up, it will be increasingly hard for the Fed to justify keeping rates in restrictive territory when core inflation is plunging,” Andrew Hunter, the deputy chief U.S. economist at Capital Economics, wrote in a client note on Friday. Rents for new tenants fell in the fourth quarter, leaving the annual change “deep in negative territory,” Hunter wrote. Because housing costs are a lot of what consumers spend money on, their decline implies that the core inflation rate (excluding food and energy) could fall to 1.5 percent as measured by the personal consumption expenditures index and to 1 percent as measured by the Consumer Price Index, Hunter wrote.


“My standard is: When in Rome, do as you done in Milledgeville.”

— Flannery O’Connor, in a letter to Maryat Lee (May 19, 1957)



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