Chris Cole: Why megabank capital standards should stay

ICBA pushes back against proposals to ease megabank capital standards.

By Chris Cole, ICBA

Following the 2008 financial meltdown, policymakers implemented stronger capital rules on the biggest banks to mitigate risks to the financial system and protect against future crises. Unfortunately for community bankers and others who wish to maintain financial stability, policymakers are now proposing to roll back these enhanced standards on the largest bank holding companies and their subsidiaries.
As policymakers continue reviewing financial services regulations, ICBA is working to ensure they don’t heed the siren song of the largest and riskiest institutions and weaken crucial safeguards on our financial system.

In April, the Federal Reserve and the Office of the Comptroller of the Currency (OCC) launched the push to ease capital standards on global, systemically important bank holding companies, known as G-SIBs, and their federally insured subsidiaries. Their plan would reduce capital levels required by the enhanced supplementary leverage ratio standards that were introduced in 2013. Members of the House Financial Services Committee and Senate Banking Committee followed up in August, asking the Fed to eliminate “excessive” capital requirements on the largest banks by recalibrating a separate capital surcharge.

ICBA came out forcefully against the regulators’ plan. In a June comment letter, ICBA noted that community banks will never forget the 2008 Wall Street crisis and the looming failure of systemically dangerous financial firms. As community bankers well know, the impact still reverberates in many local communities—particularly those that experienced the irreversible loss of a community bank or other small businesses due to the years-long economic downturn that followed.

History has a habit of repeating itself, so we must learn from our past mistakes. The G-SIBs—with their immense size, international scope and exposure; interdependence on one another; and propensity to take risks—should not be allowed to operate without elevated levels of high-quality capital. But that is precisely what would happen if these proposals were realized.

According to regulators, their plan for the enhanced supplementary leverage ratio would slash minimum capital requirements by $9 billion for G-SIB holding companies and $121 billion for their depository subsidiaries—dramatically reducing capital that would absorb credit losses in the event of another downturn. By comparison, the Deposit Insurance Fund that the FDIC maintains to insure the entire banking system holds roughly $97 billion, illustrating the magnitude of the proposed capital reduction.

These cuts would make the financial system less resilient and make another financial crisis likelier and more severe.

As former FDIC leaders Sheila Bair and Thomas Hoenig have warned, these cuts would make the financial system less resilient and make another financial crisis likelier and more severe. They’ve also noted that higher capital levels prevent failures during crises and allow for sustained lending during downturns that can limit their damage.

Meanwhile, congressional calls to reformulate the G-SIBs’ capital surcharge are based on the faulty presumption that it should go no further than international standards. The surcharge phases in additional minimum capital requirements for the largest banks, maxing out at an added 4.5 percent.

Arguing that the surcharge is hampering their ability to compete globally, the biggest banks want to see the surcharge rolled back to levels currently enjoyed by international banks.

The trouble with this argument is the biggest U.S. banks seem to be having no problem squaring off against their international competitors. Fed chairman Jerome Powell has noted that the biggest U.S. banks are highly profitable and competitive in the global marketplace, and earning good returns on their capital. In fact, Bair—who headed the FDIC during the 2008 crisis—has said stronger U.S. capital requirements helped the American banking system and economy recover more quickly than in Europe. Unsurprisingly, the big bank argument doesn’t hold up.

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Reduction in minimum capital requirements for G-SIB holding companies in proposed rollback of enhanced standards, according to regulators

Further, amid so much continued instability in international banking, marked by continued troubles in Turkey, Italy and Greece, the United States can do better than using the European system as a model for our capital guidelines. Instead, ICBA is calling on regulators to retain the current capital standards to protect against disruptions to our banking system and secure our economy over the long term.

With the United States in the middle of a bull run dating back to the end of the financial crisis in 2009—the longest in history—we can’t afford to undo our risk-mitigation tools and jeopardize our hard-fought economic recovery. The recovery is finally beginning to extend to all corners of the country as tax relief and confidence in the economy send it into overdrive. We must not let Washington put it at risk at the behest of our largest and most systemically risky financial firms.

Washington should hit the brakes on this dangerous trend toward relaxing needed protections for our financial system and economy. To protect community banks and our local communities from the continued threats posed by the megabanks, let’s continue working to preserve a safe, sound and secure capital regime.

Chris Cole ( is ICBA executive vice president and senior regulatory counsel