I’d like to take you back to a simpler time — to 2016.
Back then, the Republican and Democratic primaries were both contested, and candidates were throwing policy ideas out there to see what gained traction. One of those, at least on the Democratic side, was the question of
Into that policy scuffle stepped
That vision was ultimately consummated several months later in something called the
Fast forward to today, a time when the question of how high bank capital ought to be is still very much alive, albeit in a slightly different form. The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency issued a bank capital proposal, known as Basel III endgame, which ostensibly adjusts risk weighting of a bank’s assets and methodologies of ascertaining capital, but in effect would raise capital on the largest banks by between
But there’s another difference between the Minneapolis Plan and Basel III endgame, and that is that the Minneapolis Plan included a separate prong that would impose a tax on nonbank financial companies — including hedge funds, mutual funds and nonbank intermediaries — of between 1.2% and 2.2%, depending on systemic risk.
“We acknowledge that a byproduct of imposing higher capital requirements onto banks may be the migration of risky activity from the banking sector to nonbank financial firms, where capital requirements are lower, if they exist at all,” the plan said. The nonbank tax “would effectively make the cost of funds roughly equivalent between large banks and nonbanks.”
Again, these two proposals aren’t shooting at the same target, so pointing out that no such nonbank dimension exists in the Basel III proposal isn’t fair. But they are comparable in so far as they are both contemplating where bank capital ought to be, and if the Minneapolis Plan at least acknowledged the potential for higher bank capital to push activities outside the banking perimeter, some similar acknowledgement should be made in the form of a concrete vision for the nonbank financial sphere if bank capital is going to increase in a meaningful way, even
Federal Reserve Vice Chair for Supervision Michael Barr did acknowledge the growth of nonbank intermediation
“We should monitor the migration of activities from banks to the nonbank sector carefully, but we shouldn’t lower bank capital requirements in a race to the bottom,” Barr said. “In times of stress, banks serve as central sources of strength to the economy, and they need capital to do so.”
Fair enough. But if a level playing field between banks and nonbanks is a desirable policy outcome and bank capital shouldn’t go down, then there should be some kind of a vision of making nonbanks’ lending inputs look more like those of banks.
But try they must, because the entire idea that higher bank capital makes the financial system safer rests on the assumption that U.S. commerce runs through the banking system. Otherwise, we’re back to where we were in 2016 — or, really, 2008. That’s not a plan anyone should get behind.