A recent furniture commercial features a 1989 Queen song that repeats the refrain “I want it all” three times followed by, “and I want it now.”
This message not only apparently sells couches but also evokes the spirit of the American psyche and could be part of the reason why so much frustration and disappointment is associated with the nation’s financial services policy.
Policymakers at once want banks to help promote economic recovery by financing business and consumer loans, while also fixing their underlying problems, like overleveraging and poor underwriting that helped fuel the financial bust the country cannot seem to crawl out of.
But directives to lend more and shore up are running into tension. Critics are questioning whether these are mutually exclusive goals that need to be reprioritized, or if both policy leaders and bankers simply need to recalibrate their expectations for growth and mending.
In the “economy should come first” camp are bankers who argue potential growth is being stymied by the onslaught of regulations, like higher capital standards and increased legal risk stemming from efforts to settle claims from faulty mortgages. Regulators, on the other hand, contend that fixing fundamentals first will help rebuild confidence and put the economy back on sounder footing with sustainable investments.
The latest battle came on Wednesday with the Basel Committee on Banking Supervision, an international body of regulators that sets banking standards, announcing it had agreed to require the world’s largest and most systemically significant institutions to hold additional capital buffers of between 1 percent and 2.5 percent, or roughly $200 billion, depending on a bank’s systemic importance.
It comes on top of another requirement known as Basel 3 that banks hold capital equal to 7 percent of risk-weighted assets, and the two are slated to be phased in between 2013 and 2019.
The capital surcharges would apply to some 28 unidentified institutions internationally and is expected to include at least Goldman Sachs, JPMorgan Chase, Citigroup, Morgan Stanley, Bank of America, and Wells Fargo, in the United States. Banks that fail to comply could be hit with an additional 1 percent surcharge. But each member nation takes its own approach to adopting Basel accords, timetables often slip, and the U.S. would go through its own comment and review process first.
The banking industry has loudly criticized such surcharges as counterproductive to economic growth. JPMorgan Chase chief executive Jamie Dimon called the capital buffers “anti-American” earlier this month and challenged Federal Reserve Board Chairman Ben Bernanke in June by asking if the “cumulative effect” of regulations could be why “it's taking so long for credit and jobs to come back?”
The Clearing House, the nation's oldest association of banks, complained about the pending capital surcharges in a letter to Treasury Secretary Timothy Geithner this week, saying they would decrease the banking industry’s return on equity by 4.9 percentage points and could increase borrowing costs to consumers by 60 basis points.
"These costs can be expected to dampen prospects for economic and job growth,” wrote Paul Saltzman, the president and general counsel for the group.
Analysts said the move is intended to make it less attractive to be a mega-sized global interconnected institution, and could ultimately force banks to shrink.
Still, many argued that capital is not what is putting a damper on lending right now.
Sheila Bair, a senior adviser at Pew Charitable Trusts, who stepped down as chairman of the Federal Deposit Insurance Corp. in June, told National Journal that most big U.S. banks are at, or near, targeted capital levels, and have plenty of time to phase in additional requirements.
She said banks are sitting on piles of cash and are more constrained by risk aversion and decreased borrower demand than they are by capital.
“The impact on credit availability and credit costs is really overstated. The system is awash with liquidity right now.... I don't think that higher capital is going to have any kind of a significant impact on economic recovery.”
It is true that it increases banks’ costs to hold more capital but they can use that money as leverage to provide loans and fund other activities.
David Min, an associate director for financial markets policy at the Center for American Progress, said credit availability has tightened because of the weak economy.
Demand and credit quality are both suffering but over time proper regulation can help restore confidence, he said.
“Financial regulations can provide important stability and that is much more valuable that any small, minute differences in lending liquidity,” Min added. “I for one am very skeptical of the industry’s arguments. The evidence is overwhelmingly that this is fallout from the financial crisis.… Regulatory effects are minor and this is a tidal wave. It’s like trying to blame a tsunami on the fact that we threw a few stones in the ocean last summer or something.”
Banks are also lamenting a slew of pending legal challenges over bad mortgages. State attorneys general remain in talks with federal agencies to try and reach a global mortgage-servicing settlement; the Federal Housing Finance Agency, which oversee Fannie Mae and Freddie Mac, is suing 17 lenders for faulty loans they sold to the government-sponsored enterprises; and lenders remain wary of the uncertain cost of settling such claims.
This week the FHFA’s Office of the Inspector General issued a searing report saying that Freddie Mac failed to properly assess problem loans in its January settlement with Bank of America for $1.35 billion and that the FHFA’s approval of the deal could cost taxpayers billions in losses.
Lenders argue the uncertain amount needed to settle claims ties up resources that could go to new mortgage loans and refinancings and makes lenders far more rigid in their underwriting.
Many have argued that the FHFA’s suits, which are intended to protect the taxpayer from losses, could ultimately prove counterproductive.
“One result of that is it raises the cost of capital for banks and it makes them much more cautious in their lending,” said Mark Zandi, the chief economist for Moody’s Analytics.
Laurence Platt, a real estate finance expert with K&L Gates, said the conflicting housing policies that call for clearing housing inventory faster but drawing out the foreclosure process, add turmoil to an already stressed sector.
“It’s a bunch of people going into a variety of different directions and no grand effort to synchronize their activities,” he said. “All it really does is cause consternation in the industry, cause people to not to want to hire because they don’t know what the framework is going to be, and create risks that exceed any potential for reasonable profit. There is a natural consequence to this inconsistency.”
William Longbrake, the former vice chairman of Washington Mutual who is now an executive in residence at the University of Maryland, said that underlying problems in the financial system need to be addressed before it can generate sustainable growth, but optimism is the key missing ingredient holding back a recovery.
“It’s complicated,” he said. “It’s not an easy question to answer.”