September 19, 2023

HFS Considers Criticism of Bank Capital Proposals

The House Financial Services Committee considered testimony from witnesses on the impact of, and interaction between, recent regulatory banking proposals to implement Basel standards and increase capital requirements.

At the hearing, the following witnesses testified:

  • Harvard Law School Emeritus Nomura Professor of International Financial Systems Hal S. Scott. Mr. Scott argued that increasing capital requirements for large U.S. banks with significant trading would be both "unnecessary and counterproductive" for several reasons, including (i) that U.S. bank capital levels are already strong and (ii) the "significant" economic costs and slowing of economic growth that would result from a reduction in banks' lending and capital market activity while simultaneously increasing borrowing costs for businesses and consumers.
  • Federal Financial Analytics, Inc. Managing Partner Karen Petrou. In light of the current proposals for "substantive" reforms, Ms. Petrou advocated that Congress press regulators for (i) "far more rigorous, disaggregated quantitative and qualitative impact analyses" and (ii) prompt, corrective action standards to evaluate banks' levels of capital, liquidity and long-term debt to serve as risk indicators. Ms. Petrou also urged Congress to make "an immediate inquiry" into the reasoning for "statutory source-of-strength requirements" not being deployed upon Silicon Valley Bank's failure. She said that the FDIC should also be assessed for its "actual, ready, and effective resolution capabilities" without resorting to systemic designation.
  • Davis Polk & Wardwell LLP Partner Margaret E. Tahyar. Ms. Tahyar emphasized that "there is no a person in the world . . . who truly understands how these complex proposals interact with each other" and their impact on credit extension, capital formation and the role of the U.S. dollar. She said that the proposals should be based on empirical data instead of "political timelines." Ms. Tahyar raised concern regarding how the proposals might affect (i) the competitive position of the U.S. globally systemic banks and (ii) regional banks, to the extent that the "structure of the U.S. banking sector is permanently changed."

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