The debate over how much is too much in terms of capital requirements is heating up in DC as regulators and the financial services sector square off. Regulators are negotiating in Europe over a global "capital surcharge" for "systemically important financial institutions"—an additional capital requirement for the banks considered too big to fail.
Politically, Republicans are lining up with the financial services sector, saying higher capital requirements would not only slow economic growth but also hamper job creation and move jobs overseas as financial firms move to Europe, where regulations may not be as strong. The Democrats and regulators argue the new Dodd-Frank regulation is needed to shore up America's financial sector which is still in repair mode. To get the economic perspective on this, I decided to ask Thomas Borgers, Managing Director, Mesirow Financial Consulting his take on the regulation.
LL: How much in basis points could the three percent capital buffer impact GDP?
TB: I do not believe the additional capital will negatively impact the GDP in the long term. I believe the playing field for US banks will adjust in the next year because of the EU banks and countries are still going through a major crisis.
LL: If not a three percent buffer what would you like to see?
TB: I would have the banking regulators monitor this over the next several months to fine tune the buffer.
LL: Has the regulatory pendulum swung too far?
TB: I have to agree with Chairwomen Bair. We are still feeling the aftershocks of the Financial and Banking Crisis and one of the causes of the Crisis was the inadequate Capital Requirement of the largest banks.
LL: Will the new capital markets impact our financial system and our economic growth?
TB: It is paramount to the world that the United States demonstrate to the world stability and confidence in our banking system is important.
The increase in capital may impact the US banks in the short term, but I believe that the EU and other banks will follow with similar requirements; if not, the US Banks will have the competitive advantage being safer institutions.
LL: What unintended consequences could this have on how much banks charge their customers in terms of interest rates?
TB: There could be a up tic in the rates by a few bps but I believe that it will balance out as we move forward.
LL: Some argue the higher rates could have impact on borrowing and spending. Have you estimated how much of a cut this could have?
TB: It should not have a long term impact on the banks.The regulators should closely monitor the impact and follow how the EU addresses its sovereign and banking crisis.
LL: FDIC Chair Shelia Bair says the problem with lending "has nothing to do with capital. It's combined risk aversion on the part of banks and customer demand." Do you agree?
TB: I do agree with Chair Bair’s position that it is the combined risk aversion on the part of the banks and customer demand.
LL: One argument for the higher capital requirements is it will make the bank's equity less risky and will further stabilize the financial system. Do you agree with that?
TB: European banks have implicit state support and may have future financial instability. I believe once you put US banks vs EU banks side by side for review, US banks will have an advantage on the equity side of the equation.
LL: I still hear from bank contacts that their regulators are not allowing them to make small business loans. Will the new capital requirements further tighten the lending spigot?
TB: Small business loans is one of the most important segments of the economic recovery. Over the last couple of years, small business loans have lacked adequate support. Without meaningful support through lending for the small businesses in this country, our economy will drag at the bottom before real recovery happens for the country.
LL: Bank risk premium profiles have changed a lot. They are also doing different capital ratios based on those risk premiums. Why would you add another tax on top of this solely because of size? One can argue they are taking the measures necessary to make sure they do not become another Lehman.
TB: I believe that additional risk premium is appropriate based on the lessons learned from the Financial Crisis; however, I also believed it should be monitored very closely by the regulators so it can be adjusted or fine tune to the industry and the risks.
A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."
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