Biden bank regulations would make it harder to get a loan

That loss in lending power translates into fewer jobs and lower incomes for workers, who continue to suffer after years of sluggish economic growth.

The Fed’s regulators want these stricter rules to improve the safety and security of banks. They want to guard against the number of loans that go sour and prevent bank runs. To be fair, bank reserve requirements are a prudent safety precaution for the banks and for taxpayers who provide a federal guarantee that deposits will be safe. 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 well-respected government and private studies have found that American banks as a group are not undercapitalized and that more capital in reserve will not prevent individual bank failures. The banking sector maintains nearly $3 trillion in high-quality liquid assets, which is 4.5 times higher than 2008 levels when the run of bank failures occurred. The Fed noted in its most recent Financial Stability Report, “Measures of regulatory capital for banks increased over the second half of 2023 and point to the resilience of the banking sector as a whole.” The same report notes that a benchmark measurement for risk among the largest banks, known as common equity tier 1, is stronger than at any point in the past decade.

For this reason, the Fed was recently forced to scrap its “Basel 3 Endgame” recommendation, which would have ridiculously required increased capital requirements by up to 20%. Opposition to that rule was overwhelmingly bipartisan with over 97% of commenters opposing the rule as draconian and a drag on the economy.

Now the Fed has come back with a new rule that would force the largest banks to increase their capital holdings by 9%. That capital increase is still far higher than what’s necessary or what prevails in other advanced economies. The Bank of England and the European Central Bank are recommending just a 1%-3% increase in banks’ capital requirements. That puts U.S. banks at a competitive disadvantage.

What’s more, the higher capital requirements don’t address the true causes of last year’s failures by Silicon Valley Bank, First Republic, and Signature Bank. The higher capital requirements are being recommended to protect from operational risks, loan default risks, and trading risks. Yet those bank failures stemmed from illiquidity and bond market losses as interest rates rose. The proposed Fed rule punishes the whole banking system and its borrowers for poor oversight at a small number of banks. The new rule would be costly without fixing the regulatory problem.

Why does it matter? A recent study from the Securities Industry and Financial Markets Association finds that for every one percentage point increase in additional risk-weighted capital required, aggregate available assets decreased by $16 billion. The proposed 9% increase translates to nearly $150 billion in reduced lending. This would kneecap companies of all sizes, but particularly smaller ones that can’t access the bond market or private equity financing.

Banks don’t have a financial incentive to lose money on risky loans. If anything, they are overly risk averse, with stodgy loan officers rejecting promising projects.

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The irony is that we now have Democrats investigating banks for not making enough loans for minority businesses and homebuyers. We even had Vice President Kamala Harris promising downpayment subsidies of up to $25,000 to entice banks to make more loans. Now through the Fed’s stricter capital rules, loan officers would have to put a thumbs down on precisely the loan that the economy needs.

In this way, the Fed’s new bank rules will constrict the economy and hurt lower-income and minority borrowers the most. That doesn’t sound very fair or very prudent.

Stephen Moore is a visiting senior fellow at the Heritage Foundation and author of the new book The Trump Economic Miracle. David Malpass is a distinguished fellow in international finance at Purdue University and former World Bank president.