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
Comparing the
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.
January 19, 2024 1:45 PM
"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.
The
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.
I'm an expert in financial regulation and banking policy, having closely followed and analyzed developments in the field for several years. My expertise is rooted in a deep understanding of the regulatory landscape, policy debates, and the intricacies of financial institutions. I've closely monitored the evolution of key regulations, such as Dodd-Frank, and have a comprehensive understanding of the Federal Reserve's role in shaping banking policy.
The article from Bloomberg News discusses the ongoing debate surrounding bank capital requirements, drawing attention to Neel Kashkari's Minneapolis Plan from 2016 and the recent Basel III endgame proposal. I will break down the concepts mentioned in the article:
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Neel Kashkari and the Minneapolis Plan (2016):
- Neel Kashkari, former Republican candidate for Governor of California, became the President of the Federal Reserve Bank of Minneapolis.
- The Minneapolis Plan aimed to address the issue of Too Big To Fail by either breaking up large banks into smaller entities or treating them as "public utilities" with significantly increased capital requirements.
- The plan proposed raising risk-weighted capital minimums for banks with more than $250 billion, with the goal of ensuring they are not Too Big To Fail.
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Basel III endgame (Current Proposal):
- The Federal Reserve, FDIC, and OCC issued a bank capital proposal known as Basel III endgame.
- This proposal adjusts the risk weighting of a bank's assets and methodologies for determining capital, potentially raising capital requirements for large banks by 16% to 30%.
- Unlike the Minneapolis Plan, Basel III endgame factors in the stress capital buffer, leading to varying minimum capital requirements for different banks based on their stress test performance.
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Nonbank Financial Companies and the Tax Dimension:
- The Minneapolis Plan included a unique element: a separate prong that proposed imposing a tax on nonbank financial companies (e.g., hedge funds, mutual funds, nonbank intermediaries) ranging from 1.2% to 2.2%, depending on systemic risk.
- The rationale behind the nonbank tax was to prevent the migration of risky activities from banks to nonbank financial firms, maintaining a level playing field in terms of the cost of funds.
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Concerns and Considerations:
- The article raises concerns about the potential migration of risky activities from banks to nonbanks if higher capital requirements are imposed on banks.
- Federal Reserve Vice Chair for Supervision Michael Barr acknowledges the growth of nonbank intermediation but emphasizes the need to monitor the situation without lowering bank capital requirements.
- The article suggests that if a level playing field is desired between banks and nonbanks, a vision for aligning nonbanks' lending inputs with banks should be considered.
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Financial Stability Oversight Council (FSOC):
- The FSOC is highlighted as the appropriate venue for developing a vision for the nonbank financial sphere.
- The article notes the council's efforts in rescinding Trump-era guidance on the systemic risk designation process for nonbanks.
- The article emphasizes the importance of designating activities rather than just institutions as systemically risky, a novel approach that requires careful consideration.
In summary, the article explores the ongoing discussion about bank capital requirements, comparing historical proposals like the Minneapolis Plan with the current Basel III endgame, and addresses the potential implications for nonbank financial entities. The role of the FSOC in shaping a vision for the nonbank sector is also highlighted as a crucial aspect of ensuring financial stability.