November 15, 2023

ICYMI: At Banking Committee Hearing, Warren Calls on Federal Reserve to Finalize Strong Capital Rules to Safeguard the Economy

Warren: “This proposed rule is 15 years overdue. I urge you to finalize it and put strong capital requirements in place as soon as possible.”

Video of Exchange (YouTube)

Washington, D.C. — Yesterday, at a hearing of the Committee on Banking, Housing and Urban Affairs, U.S. Senator Elizabeth Warren (D-Mass.) questioned Michael Barr, Vice Chair for Supervision at the Federal Reserve, on a proposed rule to strengthen capital requirements for big banks. The proposed rule, an implementation of the Basel III Endgame agreement, would raise capital requirements for banks with more than $100B in assets. The rule also comes in the wake of the SVB, Signature, and First Republic bank collapses in March of this year – the second, third, and fourth-largest bank failures in American history. 

At the hearing, Senator Warren highlighted the critical role strong capital requirements play in safeguarding the economy, and questioned Vice Chair Barr on the inaccurate, self-interested claims made by the big bank lobby about the impact the proposed rules would have on access to credit. Senator Warren also stressed the need for the Federal Reserve to swiftly finalize the strongest version of the rule.

Statement: Oversight of Financial Regulators: Protecting Main Street Not Wall Street
U.S. Senate Committee on Banking, Housing and Urban Affairs
Tuesday, November 13, 2023

Senator Warren: Thank you, Mr. Chairman.

I shouldn't have to say this in 2023. Sexual harassment is never alright. Never. It is important that the FDIC leadership gets to the bottom of this and holds harassers accountable.

Now, last spring, the second and third and fourth biggest bank failures in US history occurred. Those failures cost the FDIC over $30B. In other words, the investors and executives took on big risks, they made big money and then left the US government on the hook when they couldn’t cover the outstanding deposits.  

That’s not supposed to happen. After the crash of 2008, regulators were supposed to put in place rules to require big banks to have enough capital to cover financial shocks so that taxpayers don’t have to do that. 

And now here we are 15 years later, and regulators are finally near the finish line. In July, they put out proposed rules for stronger capital requirements, including the so-called Basel III Endgame rules. 

But Wall Street executives don't want to have to put up more capital. Higher capital standards make banks safer, but they also nip into profits and make it harder for CEOs to pull in multimillion dollar bonuses. 

So the CEOs and their big time investors have hired an army of lobbyists to stop the new capital standards from ever seeing the light of day. Their leading argument right now is that stronger capital requirements would hurt lending to small businesses all across America. I think we've heard some of that this morning.

Vice Chair Barr, how many insured depository institutions would the proposed rule apply to?

Michael Barr, Vice Chair for Supervision, Federal Reserve: Thirty-seven.

Senator Warren: Thirty-seven.

So, there are almost 4,700 insured depository institutions in the United States. If I have my math right, that means that the capital rules for more than 99 percent of the nation’s banks – including the community banks that serve small businesses, farms, and American families – those rules aren’t going to change one bit.

Vice Chair Barr, for the 1 percent of banks that are covered by these rules, will stronger capital requirements make it harder for them to extend credit to small businesses?

Vice Chair Barr: We don't believe so. Under the current proposal, the effects on the credit side of the house are very, very small as a portion of this rule, but we're of course open to comment on that issue.

Senator Warren: So, am I understanding that you're saying that most of the capital standards are related to non-credit activity. That is, not to small business lending?

Vice Chair Barr: That’s correct. Most of the increase is a result from trading and derivative activities and operational risk associated from non-lending active 

Senator Warren: So the lobbyists for the big bank CEOs claim that stronger capital standards will really hurt lending—which just isn’t true. But where are the lobbyists for the American people? Remember, if we don’t get tougher capital requirements, the next time there’s a problem it’s taxpayers will be forced to pick up the slack.  

As I read the new capital standards, they apply, for example, to trading in risky financial products like derivatives. They also apply to things like operational risks, or fraud or processing errors.

Vice Chair Barr, have big banks ever lost money om risky financial products or activities? 

Vice Chair Barr: Yes, Senator, they have. For example, in the worst quarter of the financial crisis, banks lost about $38 billion from those kinds of trading losses.

Senator Warren: Okay, and what about operational risks? Have banks ever lost money because of those? 

Vice Chair Barr: Yes, unfortunately, banks have lost significant sums from operational risks, rogue trading activity, activity related to illegal sales practices, mis-selling practices, in retail brokerage and otherwise.

Senator Warren: And that is where you have focused the increased capital standards, am I right?

Vice Chair Barr: That is correct. 

Senator Warren: So the Fed is focused with surgical precision on raising capital standards for the 1% of banks that pose the biggest risk to the economy, and on the specific banking activities that pose substantial risks. I understand that the lobbyists for that 1% of banks don't like it, but we don't work for them. 

This proposed rule is 15 years overdue. I urge you to finalize it and put strong capital requirements in place as soon as possible.