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.