ICBA Offers No Evidence Supporting Call for Higher Capital

ICBA Offers No Evidence Supporting Call for Higher Capital

We assume that the Bank Policy Institute is one of the “sleekly reformulated lobbying groups” that Rebeca Romero Rainey calls out in her recent Bank Think note “Dear regulators:  Don’t loosen megabank capital standards.”  BPI prides itself on making only evidence-based arguments about regulatory design and calibration.

On the GSIB surcharge, one of the two regulations Romero Rainey discusses, BPI has published a data-based analysis by which the Fed could adjust its formula to account for economic growth and for the risk-reducing effect of other post-crisis regulations.  The former is an adjustment the Fed indicated from the beginning it intended to make, and without it, the GSIB surcharge has been effectively increased every year since its adoption.  The latter is grounded in analysis from the Financial Stability Board and the Bank of England.

On the supplementary leverage ratio, the other regulation whose reform she criticizes, we have published easily replicable evidence that leverage ratios are poor predictors of bank failure, and the New York Fed recently published an analysis finding that binding leverage ratios lead banks to take on more, not less, risk.  Neither of these results is surprising, given that a leverage ratio ignores the risk of assets and requires the same amount of capital to be held against a U.S. Treasury security as a subprime 30-year loan.  The view that the SLR should be calibrated as a backstop is therefore hardly new:  every member of the Federal Reserve Board expressed that view in the open meeting when it passed the SLR (the video is on their website).

By contrast, Ms. Romero Rainey argues that any attempt to examine the efficiency of the post-crisis regulatory regime is unwarranted because…  well, more capital is always better than less capital (for all banks except those she represents).  She cites no evidence on what is the correct level of capital.

Capital is important.  Liquidity is also important.  So, too, are economic growth (which high capital reduces) and capital market liquidity (which high capital also reduces).  Weighing those interests is an incredibly difficult — and fortunately for us, incredibly interesting — endeavor.  It is why we approach our work with diligence and with great empathy for the regulators who must make the ultimate decisions.

We include our research in a weekly newsletter, called BPInsights.  You can sign up for it on our website, BPI.com, where you can also find all of our past research.  The website is designed to be easily navigable.  You might even call it sleek.

 

Disclaimer: The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Bank Policy Institute or its membership, and are not intended to be, and should not be construed as, legal advice of any kind.