Stephen Reader covers politics for It's a Free Country, WNYC's interactive politics site. He joined the station in 2010 and has also worked for Studio 360, WNYC's Peabody Award-winning show about art, culture, and creativity.
Is Bank Regulation Excessive, or Necessary?
Monday, June 20, 2011
Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on the Brian Lehrer Show, Deborah Solomon, financial policy writer for The Wall Street Journal, talked about delays in implementing financial industry regulations and what impact they are likely to have on Wall Street profits.
Since passage of the Dodd-Frank Act last summer, which placed new regulations and raised capital requirements on big banks, there's been a consistent effort from business interests and the political Right to repeal. Presidential candidate Newt Gingrich recently renewed calls to do away with the law, citing an economic depression as grounds to leave financial institutions alone so they can get back to the business of lending.
Deborah Solomon said that banks are particularly miffed about being required to hold more capital in case of future crises. Exorbitant minimums make banks less able to put more money into the economy, they argue.
They don't like that. They think they've boosted their capital cushions well enough. Obviously they all did these stress tests during the crisis and had to raise capital; they feel like they're already complying with an international agreement that gets capital levels higher and asking for any more is overkill and would put them at a disadvantage with overseas banks, which may not be as well capitalized and make them less willing to spend their money elsewhere.
Checks and balance
Big banks may not like it, but some critics say that's a good thing. Excessive regulation could actually tax and burden too-big-to-fail banks out of existence, dispersing all the functions of complex and obscure financial giants into smaller, more focused, more easily governable bodies. Deborah Solomon said there was something to that argument, and that bad-tasting medicine might be best for everyone in the long term.
If you make these capital standards high enough and burdensome enough, then firms aren't going to grow larger. If you know that you have to hold a lot more capital because you have some risky assets, you might think twice about holding those assets.