OPINION:
The rapid succession of bank failures last spring clearly spooked regulators at the Federal Deposit Insurance Corp. and the Federal Reserve Board as well as bank depositors. Poor decision-making at Silicon Valley Bank, Signature Bank and First Republic Bank caused the regulators to implement emergency measures in banks. It conjured up memories of the 2008 financial crisis.
But as the saying goes, in Washington, a crisis is always a terrible thing to waste, so we are seeing a reflexive response for more government intervention. It’s no surprise that Senate Democrats immediately pounced into action, calling on federal regulators to add another layer of rules, including a complex increase in capital requirements on the U.S. banking system. Reacting quickly, the Federal Reserve, with the Office of the Comptroller of the Currency and the FDIC, released a joint proposal for the U.S. implementation of the so-called Basel III regulatory framework.
These are complex rules, but in a nutshell, the rules would increase the amount of money that banks hold in reserve by 25%.
Sorry, but this won’t stop occasional failures among the hundreds of banks in this country. What it will do is choke off lending to small businesses, homebuyers and consumers.
The theory behind higher capital requirements is that banks will have more money in reserve to offset the losses from loans that go sour. Bank reserve requirements are a good precaution, for sure. We don’t want banks to take on too much risk and then rush to a taxpayer safety net every time they are in trouble. But many respected government and private studies have found that American banks as a group are not undercapitalized, nor were the banks that failed.
Those banks made a series of bad investment and lending decisions. Ironically, some of the bad decisions, such as holding on to “safe,” low-interest-paying Treasury bonds, which then lost market value when the Fed finally began raising interest rates, were a direct result of federal regulations.
The FDIC and the Federal Reserve are authorized to maintain the health and safety of America’s banks. Their job is to avoid 1930s-style bank runs that could do great damage to our financial system. Here’s the problem: These new rules would punish banks that are financially sound and shrink the pool of loans available to homebuyers, small businesses and lower-income families. Less lending to qualified borrowers would mean less economic growth and less financial stability.
A forthcoming Committee to Unleash Prosperity study co-authored by David Malpass, the former president of the World Bank and myself finds several negative — unintended — consequences of these rules based on the best research findings:
First, they will reduce the available pool of capital by an estimated $100 billion to $150 billion a year.
Second, the reduction in lending will reduce economic activity and thus shrink annual gross domestic product by as much as 0.6%.
Third, because foreign banks are not subject to these regulations, American banks will lose competitiveness to foreign banks.
Fourth, and most importantly, it’s the little guy that gets squeezed out of the lending market. Small businesses and lower-income families are most likely to be the ones whose loan applications are rejected as a result of these new rules.
It’s simple: Lending is the oxygen that keeps our economy vibrant and competitive. Cut it off, as the Basel rules propose, won’t make our economy safer, but will put it at greater risk.
• Stephen Moore is a senior fellow at The Heritage Foundation and an economist with FreedomWorks. His latest book is “Govzilla: How the Relentless Growth of Government Is Devouring Our Economy.”
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