Last July, the Federal Reserve and other financial regulators proposed rules on bank capital standards that have been more than a decade in the making. The rules require banks to hold more capital against loan losses, as a way of discouraging the kind of high-profit/high-risk banking practices that crashed the economy in 2008.
The rules, once finalized, will also carry out an agreement that the U.S. made with other major nations to tighten bank regulation, known as Basel III. The proposed U.S. rules go a bit beyond the minimal standards of Basel III.
Requiring banks to hold slightly more capital will depress their appetite for high-risk activities and slightly restrain exorbitant bank profits. Predictably, the big banks have mounted an all-out war against these rules, using community organizations, small businesses, and civil rights groups as fronts.
According to the banks’ dire predictions, requiring higher reserves against losses will depress not only dangerously speculative activities such as derivatives trading, but worthy activities such as lending to small businesses and low- and moderate-income homebuyers.
These claims, once examined carefully, are nonsense.
For starters, the new capital rules apply only to the 33 largest banks, which do a minuscule share of the nation’s mortgage lending. Second, according to the Fed’s own calculations, the new rules will raise the banks’ own cost of funding loans by just 0.03 percentage points.
To put that figure in perspective, as the group Better Markets has pointed out, the four largest banks have $4 trillion in loans outstanding. Against that lending, 0.03 percentage points is $1.2 billion. Since 2013, those banks have paid out $584 billion in dividends and share buybacks. $1.2 billion is a blip.
Moreover, the largest banks are barely in the mortgage business. In 2023, the six largest banks provided only 7 percent of all mortgages.
According to Americans for Financial Reform, the non-bank Rocket Mortgage, which originates home loans and then sells them in the secondary mortgage market to Fannie Mae and Freddie Mac, makes more home loans than Wells Fargo, Bank of America, and JPMorgan Chase combined. Carter Dougherty of AFR told me, “The big banks are close to irrelevant in the mortgage market for low-income and Black and Latino families, and remember that this proposal only affects the biggest banks.”
Big banks were more implicated in mortgage markets during the housing bubble inflation and collapse of 2008. They originated more loans then, serviced a lot of loans that other lenders originated, financed the securitization of subprime loans, and served as trustee banks for securitized subprime mortgages.
The new capital rules apply only to the 33 largest banks, which do a minuscule share of the nation’s mortgage lending.
After the collapse, the big banks and their servicing arms failed to refinance mortgages, despite a provision of the emergency bailout program earmarked explicitly for foreclosure relief. The subprime collapse was especially devastating to Black homeowners. After 2008, the rate of Black homeownership fell from 49 percent in 2008 to 42 percent today.
In recent months, the biggest banks have continued their discrimination against Black mortgage applicants. In December, the Consumer Financial Protection Bureau launched an investigation against Wells Fargo for pricing mortgages less favorably for Black homebuyers. In each of the past five years, Wells provided fewer mortgages than it did the year before.
Wells, JPMorgan Chase, and Bank of America made only about 3 percent of all mortgage loans to Black homeowners in the past five years. In October 2020, JPMorgan Chase pledged 40,000 new loans to Black applicants. So far, they have made 122. And this all happened long before the new regulations that will supposedly deter lending to Blacks. If the banks truly wanted to make more mortgage loans, no capital rule was stopping them.
As CNBC recently reported, Wells has repeatedly been in trouble with regulators for abuses related to mortgage lending. In 2012, it paid more than $184 million to settle federal claims that it put minorities disproportionately into subprime loans. It was fined another $250 million in 2021 for mortgage lending practices, and paid $3.7 billion for consumer abuses on products including home loans.
Meanwhile, the same banks crying that they won’t be able to serve Black homebuyers are the ones condemning the CFPB’s bid to limit bank overdraft fees, which disproportionately affect communities of color.
IN LIGHT OF THESE REALITIES, it is the height of hypocrisy for the big banks to base their attack on the new capital standards on the supposed impact on mortgage lending. But what’s even more shameful is to see civil rights and community groups fronting for the banks.
I’ve reported on a front group created by Goldman Sachs called 10,000 Small Businesses Voices, which is run out of a public relations firm. Some 3,000 small-businesspeople signed a letter created by Goldman, echoing Goldman talking points. Meanwhile, Goldman has sued the CFPB in an attempt to block that agency from enacting a rule that would require financial institutions to report demographic data on small-business lending.
The deadline for comments on the capital rules was January 16. So in mid-January, various groups sent in a flurry of letters. Many of these, even by supposedly progressive groups, mimicked the big banks’ talking points. My colleague David Dayen previously reported on some of these comment letters at the end of November.
More recently, the National Housing Conference sent a comment letter to the federal regulators warning that “the stricter credit requirements proposed in this [rule] would create a distinct disincentive for banks to participate in mortgage lending by requiring additional capital to be held unnecessarily.”
That letter was signed by 27 groups, including the NAACP and the Urban League. As the careful research by Better Markets and Americans for Financial Reform makes clear, this and other claims are bogus, but they help sustain and legitimize the propaganda campaign by Wall Street to water down the capital rule.
Meanwhile, the big banks continue to set up front groups in an effort to hide behind their supposed devotion to mortgage lending and minority communities. A group called the Black Homeownership Collaborative is touting a plan to create three million new Black homeowners by 2030. It is backed by Bank of America, JPMorgan Chase, and Wells Fargo, among others. Good luck getting more than a trivial fraction of the needed financing from that crowd, with or without weaker capital standards.
The big banks continue to set up front groups in an effort to hide behind their supposed devotion to mortgage lending and minority communities.
One of the most instructive set of comments on the proposed rules comes from the National Community Reinvestment Coalition. NCRC was created to help local groups pressure banks to do more community lending, using the leverage of the Community Reinvestment Act (CRA). When I was a Senate staffer to Sen. William Proxmire in the mid-1970s, I wrote the draft of CRA, and I’ve spoken at NCRC conferences.
NCRC and the banks are frenemies. NCRC pressures banks to agree to community benefit agreements that increase bank lending flows. When the banks agree to these deals, everyone looks good.
NCRC’s letter to the regulators focuses microscopically on proposed rules changes that would require slightly higher risk weighting for some categories of mortgages. These are a very small fraction of all mortgages, since mortgages insured by FHA have generous risk weights, and those that are bought by Fannie Mae and Freddie Mac are not subject to capital rules at all.
The headlines in the NCRC letter of January 15 are nicely alarmist, giving the bank lobbyists quotable material from a bona fide community organization: “The overly aggressive capital requirements are likely to make mortgages significantly more expensive and unattainable for the lower-wealth populations that rely to a greater extent on high [loan-to-value] mortgages.”
This claim doesn’t pass the Pinocchio test, since most mortgage lending is not covered by the proposed rule at all. Drill way down and the NCRC’s comments are more nuanced, but the tone of the letter was enough for the bankers to include NCRC in press accounts of the community coalition against the rules.
The big bankers have even enlisted Democratic senators to mimic their talking points. What this is really about, of course, is bank profits, which translate into share prices and executive bonuses.
One curiosity of this whole battle is the heroic role of Michael Barr, the Fed’s vice chair for supervision, and the lead regulator pushing for tough capital rules, in opposition to some of his fellow Fed governors. Back in 2009-2010, Barr was assistant secretary of the Treasury under Tim Geithner, and was one of the key officials who failed to demand that banks use earmarked federal bailout money to refinance mortgages.
I’m not sure whether Barr’s new toughness reflects his new role as a Biden appointee, or whether it is also in some sense penance. Whatever it is, let’s hope he and the other regulators hold the line against a bogus community coalition to water down the rules on behalf of Wall Street.