The nation's biggest banks have a common gripe: They have too much money.
Since the 2008 financial crisis, Wall Street has been forced by regulators to set aside larger financial reserves, enough capital to survive losses they may suffer in an emergency -- without the help of taxpayer bailouts. Now, some of the industry's key players say their financial cushions are getting too plump.
“Left to our own devices, we wouldn’t hold as much capital as we’re holding,” Lloyd Blankfein, chief executive of Goldman Sachs, said in an investor conference earlier this year. "It is clear that the banks have too much capital,” Jamie Dimon, head of JPMorgan Chase, said in his annual letter to shareholders. "We think it’s clear that banks can use more of their capital to finance the economy without sacrificing safety and soundness."
With lower capital requirements, the industry argues, banks could buy back more of their own stock or increase dividends, effectively returning the wealth to shareholders.
Regulators have largely dismissed the industry's complaints, saying banks may need even more capital, not less. "Although capital standards are higher than before the last crisis, they are not nearly high enough," Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, said in response to Dimon's shareholder letter. "Unfortunately, regulators have taken it easy on the large banks, which today have only about half of the equity they need."
But that could change under President Trump. The White House has said regulators went too far in regulating the banking industry, making it too hard to get a loan.
At the center of the debate is one of the chief causes of the financial crisis: Banks had too much debt and not enough capital to absorb growing losses and had to be bailed out by taxpayers.
The industry has significantly increased its financial cushion since them. The common equity capital ratio -- which compares an institution's core equity to the relative risk of its various assets---is one measure of an institution's ability to absorb losses. The ratio for the country's largest banks has more than doubled from 5.5 percent in early 2009 to 12.2 percent by 2016, according to the Federal Reserve. That amounted to an increase of more than $700 billion to $1.2 trillion in such capital.
But just how much banks should hold and what forms it should take remains a contentious issue.
"Too little capital is bad for a company, too much capital is also bad," said Ed Mills, a policy analyst at investment bank FBR Capital Markets. After Trump's election, "what investors got excited is that we may be seeing the high watermark" in the amount capital banks are required to hold.
One approach championed by some Republicans is to give banks regulatory relief if they hold onto more capital. In legislation passed last week by the House, banks that raised more capital would be eligible for an "off-ramp" and would not face the same level of regulatory scrutiny. But critics say the requirement included in the legislation is still too low. The bill is likely to meet stiff resistance in the Senate, but even if it did pass, many of the biggest banks are not likely to choose the off-ramp, industry analysts say. JPMorgan Chase would need to set aside an additional $107 billion to take advantage of that option, according to research by Nomura, a global investment bank. Goldman Sachs and Bank of America would need to set aside an additional $45 billion and $82 billion, respectively.
“The challenge for regulators is that there is no magic number for what is the appropriate amount of capital,” said Kevin Petrasic, a banking partner at White & Case LLP.
“Economic risks change over time, they inflate and contract,” he added. “How do you establish capital criteria that are flexible for all types of situations? What is the appropriate amount of capital, relative to the potential risk?”
The current capital standards are already too high and complex, industry officials say. U.S. regulators sometimes “gold plate” the standards set by international groups, putting American firms at a disadvantage, they say. Also, how U.S. regulators count capital can differ according to agency or the rule under consideration.
That has prompted some banks to hold onto more capital than they need, creating a buffer to comply with changing federal standards. Banks are sitting on $131 billion in excess capital, according to a March research report from Goldman Sachs. If capital requirements are lowered, banks could return the money to shareholders in the form of dividends, boosting the payouts perhaps by 45 percent in 2018, the report found.
Hampering the industry's arguments has been record profits. Despite the higher capital requirements, the country's banking industry reported more than $171 billion in profit last year and the volume of bank loans has increased significantly since the financial crisis. “To the point that they have shown themselves profitable, the Federal Reserve has taken the opportunity to further raise capital” requirements, said Mills of FBR.
In a 2015 column in the Financial Times, former Federal Reserve chief Alan Greenspan argued that having 20 percent capital was reasonable. "The objection to a capital requirement of 20 percent or more, even when phased in over a series of years, is that it will suppress bank earnings and lending. History, however, suggests otherwise," Greenspan said.
And former Federal Reserve governor Daniel Tarullo said in his final speech last April that it may be time for banks to increase capital again. A recent study by three Federal Reserve Board researchers concluded that some capital levels should be between 13 percent to 26 percent, he noted. "Current requirements for the largest U.S. firms are toward the lower end of this range," he said.