A MARTÍNEZ, HOST:
For most of us, banks are where we keep our checking accounts or where we go to get a mortgage or a car loan. But as we learned in the Great Depression, in the global financial crisis of the mid-2000s, and also with the collapse of Silicon Valley Bank this past March, when banks get in trouble, the whole economy shakes. That's why the Federal Reserve and other banking regulators want big banks to hold bigger capital cushions, so they're less likely to fail. Now, this proposal is drawing intense criticism from the banks. To explain what it's all about, we turn to David Wessel. He's director of the Hutchins Center at the Brookings Institution. So, David, first tell us, what exactly is bank capital?
DAVID WESSEL: Bank capital is the amount of money that bank shareholders have invested in the business. It's a cushion that can absorb losses if borrowers don't pay back the loans so banks have enough money to cover consumer deposits. If banks don't have enough capital when things go wrong - and they certainly didn't have enough back in 2007 - then they either fail or get bailed out by the government and the economy suffers because it takes time for the banks to return to health so they can lend again.
MARTÍNEZ: All right, so that's bank capital. What's at stake then - not just for bank stockholders, but for all of us, the rest of us?
WESSEL: The bankers tell us that if they're forced to have too much capital, if their government requires them to take out too much insurance, they'll end up lending less, and that'll hurt the economy. The rest of us, though, want banks to hold enough capital so they're unlikely to fail - not so much that we can't get loans, and that's a tricky balance.
MARTÍNEZ: All right. So what exactly, then, are federal regulators proposing now?
WESSEL: Well, in the years following the global financial crisis, regulators made the banks hold more capital, and they're now proposing to make the 37 banks hold still more, about 16% on average - more for the very biggest banks. Now, the proposal is incredibly complicated. It fills 316 pages of small type in the Federal Register. But basically, banks that have the riskiest portfolios of loans and securities would have to hold more capital. And the regulators want to make a lot of technical changes to the way the banks calculate the amount of capital they need to have - mainly relying less on internal bank models and more on standard models imposed by the regulators.
MARTÍNEZ: And why aren't the banks happy about this?
WESSEL: Well, look, the more capital a bank has to hold, the harder it is for them to make money. So the big banks have launched an unusually public and aggressive campaign. Now, they know they're not going to win much support by talking about the impact this is going to have on their bottom lines, so they're focused on the impact this is going to have on the economy, on small businesses, on mortgage borrowers. It's amazing. They've launched websites with URLs like americanscantaffordit.com. And one political action committee siding with the banks even ran a TV ad on a Sunday NFL game saying that the capital rules raise costs to consumers. Now, proponents of the tougher capital rules, including the regulators, say, look, the banks are exaggerating this. The costs are modest compared to the benefits of reducing the risk of banking crisis that can have long-lasting really bad effects on the economy.
MARTÍNEZ: So, as I understand it, capital requirements are made by the regulators, not by Congress. Still, though, politics are definitely involved in this. So what's that like?
WESSEL: Absolutely. The banks have really raised this to a political issue, and it's very polarized. On the Fed board, two of six governors voted against even putting the proposal out for a comment. On the Federal Deposit Insurance Board, two of the five directors also voted against it. All of the no votes were from Republicans. All the Republicans on the Senate Banking Committee have signed a letter blasting the regulators. Democrats are split. Some have expressed reservations, but others, including the chairman of the Senate Banking Committee, are standing behind the regulators.
MARTÍNEZ: So what happens now?
WESSEL: Well, the regulators are going to take comments until January of next year, revisions are very likely, tweaking some of the details and probably scaling back some of the most controversial elements.
MARTÍNEZ: All right. That's David Wessel. He's director of the Hutchins Center at the Brookings Institution. David, thanks.
WESSEL: You're welcome. Transcript provided by NPR, Copyright NPR.
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