Dealing With Big Banks

In the Wall Street Journal Federal Reserve member bank president and FOMC member Neel Kashkari writes:

There’s a straightforward way to help prevent the next financial crisis, fix the too-big-to-fail problem, and still relax regulations on community lenders: increase capital requirements for the largest banks. In November, the Federal Reserve Bank of Minneapolis, which I lead, announced a draft proposal to do precisely that. Our plan would increase capital requirements on the biggest banks—those with assets over $250 billion—to at least 23.5%. It would reduce the risk of a taxpayer bailout to less than 10% over the next century.

Alarmingly, there has been recent public discussion of moving in the opposite direction. Several large-bank CEOs have suggested that their capital requirements are already too high and are holding back lending. As this newspaper reported, Bank of America CEO Brian Moynihan recently asked, “Do we have [to hold] an extra $20 billion in capital? Which doesn’t sound like a lot, but that’s $200 billion in loans we could make.”

It is true that some regulations implemented after the 2008 financial crisis are imposing undue burdens, especially on small banks, without actually making the financial system safer. But the assertion that capital requirements are holding back lending is demonstrably false.

How can I prove it? Simple: Borrowing costs for homeowners and businesses are near record lows. If loans were scarce, borrowers would be competing for them, driving up costs. That isn’t happening. Nor do other indicators suggest a lack of loans. Bank credit has grown 23% over the past three years, about twice as much as nominal gross domestic product. Only 4% of small businesses surveyed by the National Federation of Independent Business report not having their credit needs met.

If capital standards are relaxed, banks will almost certainly use the newly freed money to buy back their stock and increase dividends. The goal for large banks won’t be to increase lending, but to boost their stock prices. Let’s not forget: That’s the job of a bank CEO. It isn’t to protect taxpayers.

So if capital requirements aren’t the problem, why does it feel so hard to get a loan today? I can speak from firsthand experience. Last year my wife and I decided to buy a house. We applied for a loan with a bank where I have been a customer for many years. I assumed that my long record with the bank and our good credit would make it easy. With the required 20% down payment, we were prequalified for a mortgage with a rate of 3.375% fixed for the first 10 years. That was an attractive rate, suggesting capital was not holding back lending.

The prequalification was easy. Then the frustration began. The mortgage banker asked for myriad documents: bank statements, 401(k) statements, brokerage statements, tax returns, W-2s, insurance records and so on. That all seemed reasonable, but as the weeks rolled on, the requests for more documentation kept coming. After a month or so, I couldn’t believe what I was being asked for. Despite having all the records of my on-time monthly rental payments in my checking account, the bank demanded a copy of my lease and to speak with my landlord.

If the president of the Minneapolis Fed gets the third degree when applying for a loan, what should you or I expect? Mr. Kashkari’s story certainly comports with my experience.

In my opinion banking has become thoroughly bureaucratized and is no longer operating on a businesslike basis. They have requirements for the sake of having requirements.

My other complaint about banks is that they’re obviously insecure and don’t even follow their own procedures. I have repeatedly been asked to give personally identifiable information over the telephone. That’s an obvious security risk and I’m confident that it’s not being reported as such. The clerks making the requests are just following standard (insecure) policies and even when they’re made aware that it’s insecure they have no choice but to persist.

3 comments… add one
  • TastyBits

    For those who are still under the delusion that a bank with $20 billion dollars loans out $19 billion and keeps $1 billion in reserve. The following from the linked article should dissuade you of that notion.

    Bank of America CEO Brian Moynihan recently asked, “Do we have [to hold] an extra $20 billion in capital? Which doesn’t sound like a lot, but that’s $200 billion in loans we could make.”

    The next time somebody tells you, “Bank A has $100 and the lend $90 to Joe, and Joe deposits $90 in Bank B. …” They are a charlatan or a fool.

    Upward and onward. The terminology is most likely incorrect, but I do not mean to mislead. I am not an expert, and it has been several years since I have delved into this. Mortgage interest rates are not a simple supply/demand equation at the time of the transaction. Most (all?) are like bonds, and there are different rates at different prices.

    Mortgages are originated, and then, sold into a tranche of an MBS. Each tranche has a fixed interest rate and a fixed amount of money. To get a better rate, the borrower pays for it, and to get more borrowers into a tranche, the tranche owner will lower the cost. This is a supply/demand based curve with a future aspect.

    This has perverse effects. As a prime borrower, it is possible to pay a negative amount of money for a higher interest rate. In other words, you receive a check at closing, and if timed correctly, refinancing can become a source of income. (I have no idea of how much is involved.)

    The interest rates or the amount allotted to them do change, but it is based upon conditions at that time. They do not just bounce around willy-nilly, but they do not operate like a hardware store selling hammers.

  • steve

    The Trump admin is already on record as wanting to decrease capital requirements. I think that if you make capital requirements large enough, you can actually do away with most regulation. I would strongly prefer that be coupled with the ability of bank management to take large personal losses if things go bad.

    Steve

  • Ken Hoop

    If the swamp is to be drained, the culture revitalized,the banks need to be nationalized exactly as the “Neo-Reaction” movement holds.

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