WASHINGTON UPDATE The High Cost of Too Much Capital Rob Nichols, President and CEO American Bankers Association In early October, I sat down with Federal Reserve Vice Chairman for Supervision Michael Barr at ABA’s Annual Convention in Nashville. The topic of our conversation was bank capital. The failures of Silicon Valley Bank, Signature Bank and First Republic Bank have prompted regulators to begin clamoring for major capital increases at larger banks. My question to Vice Chairman Barr was: why? Why, when the spring bank failures were attributed to a combination of idiosyncratic liquidity challenges, poor risk management practices and oversight missteps, did regulators put capital in the crosshairs? Why, when policymakers — including the vice chairman himself — have repeatedly stated that the banking system is strong, resilient and well-capitalized, is a major change in capital levels suddenly warranted? While I appreciated the vice chair’s willingness to engage in the conversation, I found the answers I received unsatisfying, to say the least. He echoed a common argument among proponents of the so-called “Basel III endgame,” namely that the last set of capital changes — instituted after the 2008 financial crisis — did not lead to dramatic economic declines and that the banking system continued to grow, even while holding higher amounts of capital in reserve. While these statements aren’t false, they’re a poor justification for additional capital increases now. The truth is the post-crisis capital changes did affect economic growth, and they succeeded in driving business outside of the regulated banking sector. Just look at bank mortgage originations in the years since 2007. The share of mortgage originations by banks has declined steadily since the post-crisis rule changes, plummeting from around 80% to just under 30% in 2022. That’s just one example — there are others.
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