A new proposal that could see “too big to fail” banks shrink in size has been met with harsh criticism from industry figures who say it could deter lending.
A proposal by Sens. David Vitter, a Louisiana Republican and Sherrod Brown, an Ohio Democrat, would impose a 15% capital reserve requirement on institutions with more than $500 billion in assets,meaning banks like JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley would have to set aside 15 cents in liquid assets for every dollar of liabilities, which would encourage the banks to maintain conservative balance sheets or break themselves into smaller banks.
But the 15% solution runs the risk of curtailing lending, according to Securities Industry and Financial Markets Association (SIFMA) President Kenneth E. Bentsen. Bentsen has told USA Today that to meet the proposal’s capital requirements, banks would have to cut back on current lending and reduce future lending capacity.
American Bankers Association (ABA) executive vice president of Congressional Relations James Ballentine agreed.
“Raising capital-to-asset ratios would require many banks to shrink their businesses, resulting in substantially decreased lending, tighter credit availability and higher costs to borrow,” Ballentine said.
Both Ballentine and Bentsen have argued that banks have already taken important steps to improve capital strength, with Bentsen arguing that the mooted 15% cushion would require that the U.S. walk away from the international Basel III treaty, backing out on the country’s leadership on the issue.
“It is important to note that bank capital is at near-record levels and continues to grow – capital levels are 25% higher than they were just four years ago,” Ballentine said.
Those in favor of the bill argue that it would eliminate the need for more regulations, and it would mean less risk-taking if big banks knew they couldn’t get bailed out if they got into trouble.