It's hard to rebuild trust in any relationship, and big banks can attest to that.
It's been five years since Wall Street firms nearly toppled the financial system with all of their risky lending and investing, and their regulators won't let them forget. At every turn, there are reminders of the transgression and efforts to make sure it doesn't happen again. Or at least, if it does, the country doesn't suffer as much.
Consider the latest rule on capital requirements. On Tuesday, the three banking regulators finalized a proposal to have the eight largest banks double the amount of capital they hold to absorb losses on practically every asset on their books, not just the risky ones.
These companies have to stash a minimum of 5 percent of their assets, and their FDIC-insured bank subsidiaries have to squirrel away 6 percent. To hit those levels by the time the rule takes effect in 2018, regulators say the holding companies would have to raise $68 billion and the subsidiaries would need another $95 billion in capital.
The rule, known as the supplemental leverage ratio, is far tougher than the 3 percent minimum set in a global accord by the Basel Committee. And it doesn't rely on any "risk-weighted" calculation like most bank capital rules, taking away the subjectivity that let ratings agencies and Wall Street decide that sub-prime mortgages were safe investments.
"If regulators had used a leverage ratio in the supervision of the largest banks prior to 2008, we might have better understood the high debt burden these institutions carried and better anticipated the inevitable de-leveraging process that has restrained economic growth since the crisis began," said FDIC vice chairman Thomas Hoenig, in a statement.
A staunch supporter of higher capital standards, Hoenig said he doesn't expect banks to stop taking risks, just take responsibility by having the money set aside to deal with the fallout.
And here's where the trust comes in--regulators are giving banks the benefit of the doubt that they won't crash the family car again, but there will be no keys to the car without a curfew and adult supervision.
"The financial crisis showed that some financial companies had grown so large, leveraged and interconnected that their failure could pose a threat to overall financial stability," Federal Reserve Chair Janet L. Yellen said in her opening statement before the adoption of the rule Tuesday.
She added: "Banking organizations have to hold substantially increased levels of high-quality capital...to avoid restrictions on capital distributions and discretionary bonus payments."
Financial industry groups have argued that the new standards could force banks to pull back on lending, exit certain lines of business or pass along the costs of increased capital to consumers--well-worn arguments against all regulation.
But it's entirely possible that the added layer of capital will have minimal impact on bank balance sheets. Indeed, most of the banks have said they can or will soon meet the leverage demands.
Which brings us back to the issue of trust, or better yet distrust, but not from regulators. Lawmakers and financial reform advocates remain skeptical that a few more billion dollars in the coffers of a multi-trillion dollar bank is going to make much of a difference.
"We don't believe that this is enough," said Marcus Stanley of Americans for Financial Reform. "Raising $60 billion in extra capital is helpful, but it's really not in line with the kinds of risk we saw in the financial crisis."
Stanley, however, is encouraged by the fact that the leverage rule will not end the capital discussion. Fed Governor Daniel Tarullo has not given up on plans to ratchet standards up even higher for banks deemed “systemically important.”
The Fed’s point man on banking regulation has said his team is working on a proposal to force banks to hold a minimum amount of debt that could be converted to equity in the event of a crisis, an idea he has been pitching for more than a year. He also intends to address risks in short-term wholesale funding by requiring firms that rely on the debt markets for financing to hold more capital.
In other words, it's going to take more than one or two tough capital rules for banks to gain back regulators', and ultimately the public's, trust.