Here’s one Wall Street regulation that Republicans love
The GOP has largely has a “just say no” approach to bank regulation: promise to repeal Dodd-Frank and, in the meantime, water down the pending rules. But at a Senate Banking hearing on Wednesday, some Republicans suggested there was one regulation that they not only supported, but thought could be even stronger.
To protect the financial system from risk — and taxpayers from bailouts — Sen. Richard Shelby (R-Ala.) stressed the importance of “high-quality capital,” which would ensure that a firm’s losses would be borne by shareholders, not depositors. Shelby pointed out that the new Basel III rules will require banks in the world’s leading countries to hold significantly higher levels of capital to protect them from risk. His primary concern, in fact, is not that the new capital requirements will be too weak — but that they won’t be strong enough.
“Will this amount, in your judgment, be sufficient?” Shelby asked Federal Reserve governor Daniel Tarullo, who testified at the hearing. Tarullo, a Democrat, has also been a strong proponent of stronger capital requirements as the best protection against future bailouts. In the lead up to the crisis, banks were holding historically low levels of capital, leaving them without a cushion when the subprime crisis hit and accelerating their meltdown. Since then, U.S. banks have quickly moved in the other direction, and their capital holdings are now at the highest level since the mid-1960s.
Other Republicans at the hearing praised Tarullo for stressing the issue. “There may be many things you and I may or may not agree on. But I think the emphasis on capital as a general matter is exactly the right direction,” Sen. Pat Toomey (R-Pa.) told him. Afterward, Shelby told reporters that he, in fact, supported capital requirements that went even higher than the Basel III rules, which require big banks to hold 7 percent, high-quality capital cushion to back up their lending. “The larger you are, the more capital you need,” he said, per Reuters.
By contrast, many big banks have blasted stronger capital requirements, arguing that they will restrict their ability to lend and hold back the economy at large. The Basel rules are “anti-American,” Jamie Dimon, JPMorgan CEO, asserted in September.
Why would Republicans who have largely defended big banks’ anti-regulatory push make an exception this time? In part, because it helps avoid other regulations on banks. While many Democrats have pointed to JPMorgan’s $3 billion trading loss to justify a stronger Volcker Rule, for instance, Republicans point out that JPMorgan is so well capitalized that it can absorb the loss itself — no further regulations needed.
But in part, their support of capital is based on reams of evidence showing capital works. Tarullo, an Obama appointee, agrees. “The best way to safeguard against taxpayer-funded bailouts in the future is for our large financial institutions to have capital buffers commensurate with their own risk profiles and the damage that would be done to the financial system if such institutions were to fail,” Tarullo said in his testimony, while adding that capital buffer alone wouldn’t protect the system against all risks.