The unintended consequences of new banking regulations in the wake of some of the biggest failures in U.S. history could further threaten to reduce lending at a time when many economists see a recession on the horizon.
After the collapse of Washington Mutual, the two biggest bank failures in U.S. history occurred this year; First Republic Bank, and Silicon Valley Bank. There was also a crisis in regional banks earlier this year, as most were poorly positioned to deal with higher interest rates. Naturally, this was accompanied by calls to boost regulations on the financial sector. Fed Vice Chair for Supervision Michael Barr officially laid out some of these new regulations in a plan, which numerous Senate Democrats have expressed support for.
Among the rules would be requiring big banks to increase their capital requirements (their buffer to absorb potential losses) by an average of 20%, and require smaller banks to increase their capital requirements by an average of 5%.
As economist Stepher Moore notes, banks are already well protected against an economic downturn, because they currently hold $3 trillion on their balance sheets, which is four times as much as before the 2008 crash. Furthermore;
A recent study from the Securities Industry and Financial Markets Association finds that for every 1 percentage point increase in additional risk-weighted capital required by federal regulators, the amount available for lending decreased by $16 billion. Some of the capital requirement proposals would thus shrink the pool of available capital by as much as $136 billion.
Will tomorrow’s Bernie Marcus (co-founder of Home Depot) or Steve Jobs (founder of Apple) be the odd man out under these new regulations? If there is one thing economists agree on, it is the dire need for improved economic growth — which requires more, not less, capital investment.
Similarly, a review of studies from the Philadelphia branch of the Federal Reserve found that for every 1% increase in capital minimums, lending rates will increase by 0.05%-0.15%, and economic output will contract by 0.15%-0.6%.
Matt Palumbo is the author of Fact-Checking the Fact-Checkers: How the Left Hijacked and Weaponized the Fact-Checking Industry and The Man Behind the Curtain: Inside the Secret Network of George Soros
Don't miss the Dan Bongino Show
