In her epic story on how the Washington rule-making machine is treating Dodd-Frank, Haley Sweetland Edwards explained how Congress, influenced by Wall Street, puts pressure on regulators to go easy on banks. But the reverse can also be true: lawmakers can, if they so choose, use their power to stiffen regulators’ spines.
That appears to be exactly what’s happening on what is arguably the single most important part of Dodd-Frank: the setting of requirements for how much capital the largest banks need to hold. The higher such capital requirements, the less able banks are to make out-sized profits through leverage, but also the less likely they are to need a government bailout if the economy or their loan and investment portfolios go south.
Wall Street, of course, has been mercilessly hammering bureaucrats at federal regulatory agencies like the FDIC to write the least restrictive capital requirements. And cynics have been betting, not without reason, that the agencies would cave. But yesterday, according to the New York Times, the FDIC, the Fed and the Office of the Comptroller of the Currency proposed significantly stiffer rules than most observers were expecting, rules which would require the nation’s eight biggest banks to find $89 billion more in capital.
This rather brave move by the regulators happened in part because the regulators had some cover fire from Capitol Hill:
The regulators are acting at a time when some members of Congress are calling for tougher bank regulation because they believe the sweeping overhauls instituted soon after the financial crisis fell short. Senator Sherrod Brown, Democrat of Ohio, and Senator David Vitter, Republican of Louisiana, introduced a bill earlier this year that demanded capital increases exceeding what the agencies are now proposing.
“The Brown-Vitter bill really galvanized the debate about ‘too big to fail’ and capital ratios,” said Camden R. Fine, president of the Independent Community Bankers of America, an industry group that supports the agencies’ proposed rules. “It really focused the regulators’ attention on these capital issues.”
At a time when bipartisan efforts seem about as hopeless as the search for the Ivory-billed Woodpecker, there just happens to be growing sense on both sides of the political aisle that something more has to be done to check the power of Wall Street behemoths. Lobbyists for those behemoths have a 60-day public comment period to gut the proposed new capital requirements before they go into effect, and it’s possible they could succeed. But it’s worth noting that at least at the moment, in this one rare instance, politics in Washington looks like it’s working as most of us would want it to.