The world's biggest banks brought their fight against higher capital standards to the US Congress on Thursday where Republicans hosted a hearing to vent Wall Street complaints about government regulation. Little more than two years since major banks took massive taxpayer bailouts to shore up their weak balance sheets, the US government and EU nations are trying to force the banks to hold more capital and be better prepared for future crises.
Banks are resisting, however, and the hearing showed they have support among many Republicans and some Democrats. John Walsh, a top US banking regulator, expressed concerns similar to those raised recently by large banks, which fear that higher capital will reduce their profits.
"Attempting to wring risk out of the banking system through the device of high capital requirements must be weighed against the costs ... and potentially lower economic growth," Walsh told the US House Financial Services Committee. Walsh is acting US Comptroller of the Currency. He said his agency supports requiring large banks to hold a "moderate" amount of additional capital. Final decisions on new global bank capital standards are still months away. The standards are being developed through the Basel III process being coordinated in Switzerland.
The United States is committed to full implementation of the Basel III bank capital accords "at home and abroad," US Treasury Under-secretary for International Affairs Lael Brainard told the House committee. J.P. Morgan Chase Chief Executive Jamie Dimon and other bankers have been arguing against requiring big banks to hold an extra level of capital above the Basel III minimums.
"The regulatory pendulum clearly has now begun to swing to a point that risks hobbling our financial system and our economic growth," Barry Zubrow, J.P. Morgan's chief risk officer, said in prepared testimony for Thursday's hearing. At a minimum, under the Basel pact, banks will have to hold top-quality capital equal to 7 percent of their risk-bearing assets. Analysts expect the largest financial institutions to have to hold additional capital of about 3 percent.
The Dodd-Frank banking reforms approved last year required the Federal Reserve to come up with capital requirements for banks with more than $50 billion in assets and for other large financial firms deemed important to the smooth functioning of financial markets and tapped for stricter Fed supervision.
World regulators, as part of the Basel III process, are deciding how much of an added buffer to impose on the largest, most internationally active banks. "If we over-regulate and ignore the plans of the rest of the world, then I fear we will push capital, industry and jobs right out of our country," said Republican Representative Spencer Bachus, chairman of the committee, at the hearing. Democratic Representative Barney Frank said bank profitability should not be the paramount concern when making financial regulation policy. "The fact that a particular financial institution may or may not be making a good profit is not a matter for public policy," said Frank, co-author of 2010's Dodd-Frank reforms.