Big banks crying wolf over another key Dodd-Frank regulation

Big banks’ advocates have intensified their attacks on bank regulations. To many of them, it is as if the 2008 financial crisis never happened. In particular, numerous politicians and bank lobbyists are focusing on the supplementary leverage ratio.

The supplementary leverage ratio requires that those U.S.-headquartered banks that are designated as globally systemically important allocate more common equity to cover the risks posed by on- and off-balance sheet transactions than do less systemically important banks.

{mosads}It is called the supplementary leverage ratio because it is higher than what the Basel Committee on Banking Supervision recommends in the Basel III capital, liquidity and leverage framework recommended for banks.

In April, the Federal Reserve and the Office of the Comptroller of the Currency requested public comment on a draft notice of proposed rulemaking to make changes to the supplementary leverage ratio for the nation’s largest banks.

Essentially, the proposal, if adopted, would lower what the big banks have to allocate for their level of on and off-balance sheet risks.

I have long advocated for the leverage ratio, because while imperfect, it is harder to manipulate than the risk-weighted framework in which big banks can use their credit and market risk models to determine the riskiness of on- and off-balance sheet transactions.

The supplementary leverage ratio is very important, because if a globally systemically important bank were to fail, its contagion to the global economy would be far more detrimental than when a purely domestic bank fails.

Moreover, the failure of such a large bank could compel the U.S. treasury to bailout a bank the way that it did during the 2008 financial crisis.

Arguments against the supplementary leverage ratio are not that dissimilar to the ones that bank executives usually cite against other rules that come about since the 2008 financial crisis. Their three main arguments are that the leverage ratio is stifling banks’ earnings, banks’ ability to lend to consumers and hence hurting the economy at large. Unfortunately, data do not support those three arguments.

In the first quarter of 2018, the U.S. financial sector actually reported a double-digit earnings gain in comparison to the first quarter of 2017. In fact, financial institutions reported actual earnings-per-shares (EPS) came in higher than what 77 percent of financial institution analysts had expected.

Bank of America, Citibank, JP Morgan and Wells Fargo actually delivered their best earnings in a decade. Regional banks also had good earnings, largely due to the fact that in the current rising rate environment, they can charge more for loans that they make but do not have to increase by the same amount what they pay depositors.

Lending to consumers and companies continues to rise. In the first quarter of 2018, U.S. consumer credit rose at a seasonally adjusted level by 4.25 percent. Recent numbers show that the rate of growth slowed down in credit card exposure in March, but the rate of borrowing in areas such as auto and student loans continues to grow at 6 percent, as it has in the last four months.

Additionally, commercial and industrial loans extended are at the highest point they have ever been since the Federal Reserve started tracking the data in the 1940s. Specifically, since 2009, corporate debt has been growing faster than consumer debt.

If anything, rather than claiming that bank regulations stifle lending, bank executives should be asking themselves how much longer consumers and companies can be this indebted. For any of the debt based on a variable rate, this should give us all pause, since we are now in an upward interest rate environment. As rates rise, there are likely to be individuals and companies who will not be able to afford those higher costs of borrowing.

Big bank executives arguing that the supplementary leverage ratio, and other bank regulations are hurting the U.S. economy should take note of recent macroeconomic data.

The Bureau of Labor Statistics announced that the national unemployment rate had decreased to 3.9 percent in April, the lowest unemployment rate in 18 years. Also, first-quarter GDP grew by 2.3 percent year-on-year. While this rise was slightly slower than the previous quarter’s growth of 2.9 percent, it was higher than the median forecast of 2 percent.

It is precisely because the unemployment is decreasing and GDP is rising that I urge bank regulators not to cave into big banks’ demands. These “too big to fail” banks should not receive a decrease in such a key rule like the supplementary leverage ratio.

With income inequality rising in the U.S. and wages that stubbornly are not rising to improve the standard of millions of Americans, we cannot afford to be in a situation where a big bank fails, and it privatizes its losses to unsuspecting taxpayers in the form of Treasury-led bailouts.

Mayra Rodríguez Valladares is managing principal of MRV Associates, which provides financial consulting, research and training on financial regulation issues. She has 25 years of financial regulatory experience from her time at the Federal Reserve Bank of New York, JP Morgan, BTAlex.Brown. You can follow her on Twitter: @MRVAssoc.