As Regulators Attack Banks, ‘Systemic Risk’ Finds a New Address

“Only in Washington” is so trite, yet sad truth can be found in what’s so trite. Always looking in the rearview mirror, bank regulators at the Fed are calling for big banks to raise bigger equity capital cushions that would keep them from doing, well, banking. Yes, only in Washington could a solution in search of a problem involve harming those who are supposed to be helped.

The response to the above might be that Silicon Valley Bank’s lack of a sufficient cushion amid a run calls for bigger cushions for banks more broadly. It’s the equivalent of making Kansas City Chiefs all-world quarterback Patrick Mahomes run laps since New York Jets quarterback Zach Wilson threw an interception at the end of the game on Sunday. Really, what did SVB’s difficulties have to do with J.P. Morgan, Bank of America, and Wells Fargo now?

Regulators aren’t answering, or they’re not answering sufficiently. Instead, they’re just promoting a non sequitur whereby banks like JPM will have to raise the equity capital on their books from $200 billion to $250 billion. Ok, but why? What changed such that the big banks are being asked to sideline even more in the way of precious capital? And as evidenced by the fact that JPM and others didn’t experience a run when SVB did, there’s no market-driven view that raising more capital is necessary. Basically banks are being told to weaken themselves just to weaken themselves.

That’s a problem because taxes on their face are generally a problem. Think about it. Raising this kind of capital is very expensive, and worse, the expectation is that having raised it, the funds will be sidelined, as in placed in near-money securities. Funny, but that’s what SVB did.  In short, banks are being asked to raise funds in costly fashion, only for them to be deterred from making money on those funds. This is once again a tax, and it’s a big one.

Unknown is the why behind the tax. Ok, we know why in a sense. Regulators once again look in the rearview mirror. Which is logical, at least for regulators. If regulators could see the problems banks might actually face in the future, they wouldn’t be regulators. And they wouldn’t be regulators because those who can see problems before they’re problems are billionaire investors, not regulators.

It’s a sign that the Fed’s proposals are about past problems, which means they’re already taken care of. If they weren’t, as in if big banks were exposed to a potential run born of a lack of sufficient reserves, then it’s certainly true that their equity prices would reflect this truth. Except that they don’t.

The result for banks is that they’re being asked to swallow a big tax in the form of a capital raise that they’ll not be able to utilize in pursuit of more banking and financial-service functions. What this means for banks is that they’re being asked to raise billions that won’t morph into loans for corporations, mortgages, cars, and the myriad other ways banks use funds entrusted them in order to create more wealth.

The obvious response to all this is that banks will be hamstrung in their ability to meet the needs of their customers, and while true, that’s only part of the story. The broader story is that markets don’t disappear as much they shift. If regulators choose to restrain banks from acting like banks in profitable fashion, their myriad financial and lending functions will simply migrate away from banks. In other words, “systemic risk” will find a new address.

Once again, only in Washington. Seeking to protect banks from decline, regulators are proposing rules that will make it increasingly difficult for banks to not decline.

Republished from RealClear Markets


  • John Tamny

    John Tamny is a popular speaker and author in the U.S. and around the world. His speech topics include "Government Barriers to Economic Growth," "Why Washington and Wall Street are Better Off Living Apart," and more.

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