Ranking Member Waters Leads 41 House Democrats in Urging Banking Regulators to Quickly Finalize Rules to Strengthen Capital Requirements for Big Banks, Prevent Financial Crisis
Today, Congresswoman Maxine Waters (D-CA), the top Democrat on the House Financial Services Committee, leads 41House Democrats in sending a letter to our nation’s banking regulators — specifically the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency — urging regulators to move quickly to finalize proposed rules to strengthen capital requirements for our nation’s largest banks, including a proposal to implement the Basel III endgame.
In the letter, the lawmakers emphasize the importance of strong capital rules, particularly in the wake of last year’s three major bank failures instigated by Trump-era deregulation, to ensure we have better capitalized banks that are well positioned to serve consumers and small businesses in good and bad times, and to prevent a costly future financial crisis.
“We write to express our support for your efforts to strengthen capital requirements for the largest banks, specifically through the proposed rule to implement the Basel III endgame and the proposed rule to strengthen the capital surcharge for global systemically important banks (G-SIBs). Strong capital rules are the cornerstone of an effective prudential regulatory framework that promotes financial stability and the safety and soundness of our banking system,” wrote the lawmakers. This is because capital helps shield banks from unexpected losses, preventing their failure, while serving as a source of funding that banks use, along with other sources of funds like deposits, to operate and make loans in good times and in bad. While you are to be commended for the methodical process you have engaged in – including the Fed’s holistic capital review,[3] providing the public nearly six months to provide feedback, and proposing to gradually phase in the implementation over multiple years – we encourage you to prioritize finalizing these rules this year to ensure we have a banking system that will promote stable economic growth without needless delay.”
Ranking Member Waters has sounded the alarm on the massive misinformation campaign being carried out by Wall Street executives and Republicans to convince consumers that lower capital requirements for our nation’s big banks are better. In reality, lower capital requirements means that when banks fail and we have another financial crisis, working families will lose their jobs, homes, and savings, as millions did in 2008, while wealthy corporate executives get to walk away with big bonuses.
Full list of signers: Representatives Becca Balint (D-VT), Jamaal Bowman (D-NY), André Carson (D-IN), Greg Casar (D-TX), Judy Chu (D-CA), Steve Cohen (D-TN), Mark DeSaulnier (D-CA), Lloyd Doggett (D-TX), Adriano Espaillat (D-NY), Dwight Evans (D-PA), Valerie Foushee (D-NC), Maxwell Frost (D-FL), John Garamendi (D-CA), Jesús García (D-IL), Sylvia Garcia (D-TX), Al Green (D-TX), Raúl Grijalva (D-AZ), Eleanor Holmes Norton (D-DC), Jared Huffman (D-CA), Jonathan Jackson (D-IL), Sheila Jackson Lee (D-TX), Pramila Jayapal (D-WA), Henry Johnson (D-GA), Ro Khanna (D-CA), Barbara Lee (D-CA), Stephen Lynch (D-MA), Betty McCollum (D-MN), James McGovern (D-MA), Kweisi Mfume (D-MD), Alexandria Ocasio-Cortez (D-NY), Ilhan Omar (D-MN), Katie Porter (D-CA), Ayanna Pressley (D-MA), Delia Ramirez (D-IL), Andrea Salinas (D-OR), Jan Schakowsky (D-MA), Shri Thanedar (D-MI), Rashida Tlaib (D-MI), Nydia Velázquez (D-NY), Maxine Waters (D-CA), Bonnie Watson Coleman (D-NJ), and Fredrica Wilson (D-FL).
The Honorable Jerome Powell Chair
Board of Governors of
the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
The Honorable Michael Barr
Vice Chair for Supervision
Board of Governors of
the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
The Honorable Martin Gruenberg
Chairman
Federal Deposit Insurance Corporation
550 17th Street NW
Washington, DC 20429
Mr. Michael Hsu
Acting Comptroller
Office of the Comptroller of the Currency
400 7th Street, SW, Suite 3E-218
Washington, DC 20219
We write regarding your efforts to strengthen capital requirements for the largest banks, specifically through the proposed rule to implement the Basel III endgame and the proposed rule to strengthen the capital surcharge for global systemically important banks (G-SIBs).[1] We believe strong capital rules are the cornerstone of an effective prudential regulatory framework that promotes financial stability and the safety and soundness of our banking system. This is because capital helps shield banks from unexpected losses, preventing their failure, while serving as a source of funding that banks use, along with other sources of funds like deposits, to operate and make loans in good times and in bad.[2] While you are to be commended for the methodical process you have engaged in – including the Fed’s holistic capital review,[3] providing the public nearly six months to provide feedback, and proposing to gradually phase in the implementation over multiple years – we believe it is important to finalize these rules this year to ensure we have a banking system that will promote stable economic growth for the benefit of constituents in our congressional districts and communities across the country.
Your agencies made strides following the 2008 global financial crisis to strengthen the safety and soundness of our banking system, especially by increasing large bank capital requirements, as you implemented provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act along with the initial stages of Basel III capital reforms. Indeed, capital levels in terms of tier 1 leverage ratio for U.S. G-SIBs rose from 5% in 2008 to 9% by the end of 2016.[4] And yet, according to extensive research from the Fed and others, that level was arguably insufficient.[5] In 2017, former Fed Governor Dan Tarullo gave remarks as he stepped down from the Fed, observing that based on this research, bank capital requirements were at the “lower end” of a range of “capital requirements that best balances the benefits associated with reduced risk of financial crisis with the costs of banks funding with capital rather than debt.”[6]
Instead of increasing bank capital levels further to better balance the costs and benefits of the policy, Trump-appointed regulators reversed course and advanced a series of rollbacks that amounted to what Mr. Tarullo described as, “a kind of low-intensity deregulation, consisting of an accumulation of non-headline-grabbing changes and an opaque relaxation of supervisory rigor.”[7] In response, 19 Members of Congress sent a letter led by Ranking Member Maxine Waters and Rep. Ed Perlmutter in September 2018, urging the Fed to maintain appropriately strong capital requirements for G-SIBs.[8] In December 2020, Ranking Member Waters also wrote to then President-elect Biden, and urged that his regulatory appointees “immediately take action to restore and enhance regulatory safeguards that put consumers, investors and taxpayers first, and ensures the financial system is better prepared for unexpected events. For example, your appointees should immediately reverse harmful rules that have eased prudential requirements for the largest banks, including the stress capital buffer, swap margin, and leverage rules. Based on the considerable research showing banks should maintain even higher levels of capital to appropriately reduce the risk of a future financial crisis, your appointees should further issue new rules to strengthen the capital regulatory framework especially for megabanks.”[9]
Unfortunately, Trump-era deregulation set in motion a significant reduction in large bank capital levels and pushed our banking system to the brink of collapse last March. The tier 1 leverage ratio for U.S. G-SIBs steadily fell from 9% in 2016 to 7% by 2023,[10] which represents a loss of half of the gains made in large bank capital levels following the 2008 financial crisis. G-SIBs currently maintain 2-3% less capital in terms of tier 1 leverage ratio compared to what community banks and regional banks maintain.[11] Moreover, the Trump-era rollbacks contributed to the second, third, and fourth largest bank failures in U.S. history last March. In its internal review report regarding the failure of Silicon Valley Bank (SVB), the Fed highlighted that due to a Trump-era rollback, SVB was able to opt-out of capital requirements relating to accumulated other comprehensive income (AOCI), which allowed the bank to seem better capitalized than it was with a large amount of unrealized losses in their securities portfolio.[12] The Fed estimated this AOCI opt-out inflated SVB’s capital ratio by nearly 2%,[13] making them appear stronger than they really were.
Last summer, your agencies proposed rules that would strengthen large bank capital requirements, including one to implement the final components of Basel III agreed to by Basel Committee on Banking Supervision (BCBS) in 2017, referred to as the “Basel III endgame.”[14] The proposal would reduce the ability of large banks to use internal models for measuring capital requirements, replacing those with a standardized approach set by regulators, and modestly increase capital requirements by an average of 16% for the largest banks through improved capital calculations. Specifically, we are glad this rule is focused on the largest banks with more than $100 billion in total assets, ensuring that community banks will not be impacted,[15] while also correcting the AOCI opt-out issue to ensure regional banks like SVB are not undercapitalized in the future. Additionally, this rule is responsive to recommendations made by financial regulatory experts, the Financial Stability Oversight Council (FSOC), and other stakeholders.[16] Furthermore, the Fed’s rule to strengthen the G-SIB capital surcharge will help ensure it better reflects a G-SIB’s systemic risk and prevent them from gaming the requirements to lower their capital buffers.[17]
While some have raised alarm about the Basel III endgame rule’s impact on access to credit, we appreciate that you have explained that the funding impact on a large bank’s average lending portfolio is estimated to be incredibly small – roughly an increase of 0.03% to their cost of capital to support their current lending activities.[18] That adjustment is arguably insignificant compared to many other factors that affect lending, like when the Fed raises interest rates by 0.5% or even 0.25% in a single Federal Open Market Committee meeting. Moreover, you have been clear you support access to credit in a prudent way. For example, the rule explicitly states that, “The agencies are supportive of home ownership and do not intend the proposal to have a disparate impact on home affordability or homeownership opportunities, including for low- and moderate-income (LMI) home buyers or other historically underserved markets.”[19] We appreciate that you have offered options and been very open to taking feedback from stakeholders, including on provisions related to mortgage loans, small business loans, and clean energy investments. We believe this sensible approach will help you choose appropriate options and targeted refinements so you can finalize these rules quickly to support access to credit, especially for underserved communities, and protect the economy.
In closing, we reiterate our belief that it would be beneficial if these rules are promptly implemented and if you reject industry-led attacks to materially weaken if not block the implementation of these safeguards. After all, these rules would help address glaring weaknesses with bank capital rules, including those that apply to the type of regional banks that failed less than a year ago. Moreover, some experts have suggested the capital increases may even be too modest,[20] which was underscored by Vice Chair Barr’s comments indicating that most banks already have enough capital to meet the new standards, and those that don’t could do so in a relatively short period of time.[21] Nonetheless, these rules will help ensure we have better capitalized banks that are well positioned to serve consumers and small businesses in good times and in bad, while reducing the odds we have another costly financial crisis resulting in trillions of dollars in economic loss with millions of foreclosures and jobs lost. We look forward to the timely completion of these important rules.
Sincerely,
Rep. Maxine Waters
Rep. Becca Balint
Rep. Jamaal Bowman, Ed. D.
Rep. André Carson
Rep. Greg Casar
Rep. Judy Chu
Rep. Steve Cohen
Rep. Mark DeSaulnier
Rep. Lloyd Doggett
Rep. Adriano Espaillat
Rep. Dwight Evans
Rep. Valerie P. Foushee
Rep. Maxwell Alejandro Frost
Rep. John Garamendi
Rep. Jesús G. “Chuy” García
Rep. Sylvia R. Garcia
Rep. Al Green
Rep. Raúl M. Grijalva
Rep. Eleanor Holmes Norton
Rep. Jared Huffman
Rep. Jonathan L. Jackson
Rep. Sheila Jackson Lee
Rep. Pramila Jayapal
Rep. Henry C. “Hank” Johnson, Jr.
Rep. Ro Khanna
Rep. Barbara Lee
Rep. Stephen F. Lynch
Rep. Betty McCollum
Rep. James P. McGovern
Rep. Kweisi Mfume
Rep. Alexandria Ocasio-Cortez
Rep. Ilhan Omar
Rep. Katie Porter
Rep. Ayanna Pressley
Rep. Delia C. Ramirez
Rep. Andrea Salinas
Rep. Jan Schakowsky
Rep. Shri Thanedar
Rep. Rashida Tlaib
Rep. Nydia M. Velázquez
Rep. Bonnie Watson Coleman
Rep. Fredrica S. Wilson
