September 16, 2019

Fair Game: Bankers Are Balking at a Proposed Rule on Capital

If the rule goes into effect, it will require the nation’s largest banks, those whose parent companies have more than $700 billion in consolidated assets, to double the amount of capital they have on hand to cover losses. Under the new rule, for example, Chase Bank would have to hold capital equal to 6 percent of its assets, up from the current requirement of 3 percent. Its parent company, JPMorgan Chase, would also have to increase its capital from that level to 5 percent.

Even better, the design of the new capital requirement would be much harder for bankers to game. They did just that with other types of capital rules, such as those issued under the Basel regime, the international system devised by regulators and central bankers.

The proposal, which would raise what is known as a bank’s leverage ratio, was issued jointly by the Federal Deposit Insurance Corporation, the Federal Reserve Board and the Office of the Comptroller of the Currency.

Naturally, the financial sector hates it.

The proposal would “make it harder for banks to lend and keep the economic recovery going,” said Tim Pawlenty, president of the Financial Services Roundtable, in a statement. Not that the banks are lending with abandon now.

Increasing capital will most likely reduce these institutions’ returns on equity, a measure that many stockholders use to judge a bank and that banks’ boards use to calculate top executives’ bonuses.

At the moment, big banks are riding high. On Friday, JPMorgan Chase said its net income for the second quarter was $6.5 billion, up 31 percent from the same period of 2012. The six largest banks will enjoy an average increase of 20 percent in earnings during the second quarter, according to analysts’ estimates.

Over the next two months, regulators will receive and weigh public comments about their proposal. You can be sure that, from now to then, the nation’s largest banks will do whatever they can to weaken it.

JUST getting the proposed capital rule out the door seems to have been tough, judging from one regulator’s public comments. As Jeremiah Norton, a director at the F.D.I.C., said in a statement on Tuesday: “It should not have been as difficult as it has been for the agencies to come together on today’s leverage-ratio proposal, which hardly seems like a seismic shift in capital requirements and represents an attempt to address one of the core causes of the financial crisis.”

But seismic it is to the nation’s biggest bankers. As soon as the proposed rule came out, their representatives began warning about the dire effects it would have on the economy.

Mr. Pawlenty, the former Minnesota governor and candidate for the Republican presidential nomination, trotted out that time-honored claim that is used to undercut so many regulations — that the higher capital rule was a bad idea because it would put American banks at a competitive disadvantage to foreign institutions that needn’t abide by it.

This, by the way, was the same argument that banks made just before the financial crisis. Back then, they were arguing that United States regulators should join their European counterparts in relying solely on the Basel II rules, and not impose additional capital requirements. The big banks liked those rules because they leaned heavily on bankers’ own, rosy risk models and allowed the institutions to compute capital based on the supposed risks in various assets.

This so-called risk-weighting approach was an abject failure. For example, the assumptions characterized the sovereign debt of Greece as risk-free, requiring that banks set aside no capital against those holdings for possible losses. The risk-weight system also determined, incorrectly, that highly rated mortgage securities fell low on the risk scale.

That’s what’s so beneficial in the leverage-ratio rule proposed last week: it allows for much less subjectivity in analyzing risks on a bank’s balance sheet. It also has the benefit of including more of a bank’s off-balance-sheet holdings — like derivatives — in the capital calculation. That helps give investors a truer picture of a bank’s financial position.

“The reason our banks, with their much larger exposure to toxic mortgage securities, fared better than their European counterparts during the crisis was that the U.S. regulators had already required them to meet a leverage ratio on top of the Basel requirements,” said Joshua Rosner, an analyst at Graham Fisher in New York. “Where other countries merely used Basel — which proved to be a loose belt — we required suspenders as well.”

If the new rule goes into effect, it will trump the heavy reliance on risk-weighting that remains central to the Basel rules. Once again, that would put United States banks in a better position than their foreign peers to survive future downturns.

“The United States has the opportunity to lead the world in bringing forward a financial system that is sounder in the long run,” said Thomas M. Hoenig, vice chairman of the F.D.I.C., in an interview last week. “With stronger capital, banks still have the ability to make loans, but if they do have losses they can absorb those losses without imploding the economy.”

THE regulators concede that increasing capital at these large and powerful institutions may increase the costs of borrowing. But they note that the societal benefits to increased capital — fewer expensive bailouts — will far outweigh the possible rise in borrowing costs.

Over the next two months, the regulators proposing this rule will no doubt encounter a lobbying buzz saw. Mr. Hoenig said he and his colleagues were bracing for that. Bankers, after all, prefer things just the way they are. They can load up on leverage to take risks and reap the rewards. But when losses abound? Well, they’re the taxpayers’ problem.

Article source: http://www.nytimes.com/2013/07/14/business/bankers-are-balking-at-a-proposed-rule-on-capital.html?partner=rss&emc=rss

Economic Scene: One Person, One Vote? Not Exactly

Two economists, Brian Knight and Nathan Schiff, set out a few years ago to determine how much Iowa, New Hampshire and other early-voting states affected presidential nominations.

Mr. Knight and Mr. Schiff analyzed daily polls in other states before and after an early state had held a contest. The polls tended to change immediately after the contest, and the changes tended to last, which suggested that the early states were even more important than many people realized. The economists estimated that an Iowa or New Hampshire voter had the same impact as five Super Tuesday voters put together.

This system, the two men drily noted in a Journal of Political Economy paper, “represents a deviation from the democratic ideal of ‘one person, one vote.’ ”

A presidential campaign is once again upon us, and Iowa and New Hampshire are again at the center of it all. On Thursday, Mitt Romney will announce his candidacy in Stratham, N.H. Last week, Tim Pawlenty opened his campaign in Des Moines. The two states have dominated the nominating process for so long that it’s easy to think of their role as natural.

But it is not natural. It’s undemocratic, in fact. It is unfair to voters in the other 48 states. And it distorts economic policy in several damaging ways.

Most obviously, the federal government has lavished subsidies on ethanol, even though those subsidies drive up food prices and do little to solve the climate problem, partly because candidates pander to the Iowa corn industry. (Mr. Pawlenty, who now says the subsidies must end, is an admirable exception.) Beyond ethanol, a recent peer-reviewed study found that early-voting states received more federal dollars after a competitive election — so long as they supported the winning candidate.

Pork is hardly the only problem with the voting calendar. In the long run-up to the first votes, Iowa and New Hampshire also distort the national conversation because they are so unrepresentative. They are not better or worse than other states, to be clear. But they are different.

Their populations are growing more slowly than the rest of the country’s. Residents of Iowa and New Hampshire are more likely to have health insurance. They are older than average. They are more likely to work in manufacturing.

Above all, Iowa and New Hampshire lack a single big city, at a time when large metropolitan areas are crucial to lifting economic growth. Big metro areas are where big ideas most often take shape and great new companies are most often born. The country’s 25 largest areas are responsible for 52 percent of the country’s economic output, according to the Brookings Institution, and are home to 42 percent of the population.

Yet metro areas are also struggling with major problems. The quality of schools is spotty. Commutes last longer than ever. Roads, bridges, tunnels and transit systems are aging.

You don’t hear much about these issues in the first year of a presidential campaign, though. No wonder. Iowa, New Hampshire and the next two states to vote, Nevada and South Carolina, do not have a single city among the country’s 25 largest. Las Vegas, the 30th-largest metro area, and the Boston suburbs that stretch into New Hampshire are the closest these states come.

So the presidential calendar becomes another cause of what Edward Glaeser, a conservative-leaning Harvard economist, calls our “anti-urban policy bias.” Suburbs and rural areas receive vastly more per-person federal largess than cities. One big reason, of course, is the structure of the Senate: the 12 million residents of Iowa, New Hampshire, Nevada and South Carolina have eight United States senators among them, while the 81 million residents of California, New York and Texas have only six.

Bruce Katz, a Brookings vice president and veteran of Democratic administrations, points out that the world’s other economic powers take their cities more seriously. China, in particular, has made urban planning a central part of its economic strategy.

“The United States stands apart as an anti-urban nation in an urbanizing world,” Mr. Katz told me. “Our political tilt toward small states and small towns, in presidential campaigns and the governing that follows, is not only a quaint relic of an earlier era but a dangerous distraction at a time when national prosperity depends on urban prosperity.”

The typical defense from Iowa and New Hampshire is that they care more about politics than the rest of us and therefore do a better job vetting candidates. But the intense 2008 race between Barack Obama and Hillary Clinton showed that if Iowa and New Hampshire care more, it’s only because of their privileged status. In 2008, turnout soared in states that finally had a primary that mattered, be it Indiana or Texas, North Carolina or Rhode Island.

A more democratic system would allow more voters to see the candidates up close for months at a time. The early states could rotate each year, so that all kinds — big states and small, younger and older, rural and urban — had a turn. In 2016, the first wave could include states that have voted near the end recently, like Indiana, North Carolina, Oregon and South Dakota.

A rotation along these lines would enliven the political debate. Investments in science and education, which are the lifeblood of future economic growth, might play a bigger role in the campaign. You could even imagine — optimistically, I know — that the deficit might prove easier to address if Medicare and Social Security recipients did not make up such a disproportionate share of early voters.

The issues particular to small-town America would still receive extra attention because so many of the 50 states are rural and sparsely populated. It’s just that Iowa and New Hampshire would no longer receive the extreme special treatment they now do.

And that special treatment is a nice thing, indeed. It focuses the entire country, and its next leader, on the concerns of only 1 percent of the population, as if democracy were supposed to work that way.

At a recent candidates’ forum in Des Moines, The Wall Street Journal reported, the moderator did something that seemed perfectly normal: She chided Mr. Romney for not having spent enough time in Iowa lately. “Where have you been?” she asked.

How do you think the rest of us feel?

E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt

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