Late last week, U.S. Representative Maxine Waters, Democrat of California, responded to Republican Party criticism of the Dodd Frank Wall Street Reform and Consumer Protection Act, saying that the Act prohibits the bank bailouts the nation saw in 2008 and provides an orderly liquidation of an institution in which executives are dismissed and shareholders wiped out. The issue is where a disproportionate number of minorities do not hold bank accounts, and more than likely do not hold bank accounts in the large banks targeted by the Dodd Frank Act, such as JP Morgan Chase, Citigroup, or Wells Fargo, what type of social policy benefits are brought about from Dodd Frank?
To get to that issue, we first determine what is a bank? At its core a bank is a financial intermediary sitting between savers willing to part with their money over the short term in return and borrowers who need access to funds for the purpose of financing consumer needs or business ventures. Banks, specifically commercial banks, lend a portion of a saver’s deposited funds to consumers and businesses in return for interest income. Commercial banks derive a significant portion of their revenues and profits from interest paid on loans.
Mrs. Waters and other Democrats have laid blame for the recession of 2007 and the financial crisis of late 2008 on large commercial banks; banks that were not in a position to help reignite a stagnant economy by lending funds to strapped households facing foreclosure or small businesses trying to either expand or simply stay afloat.
House Financial Services Committee chairman Jeb Hensarling, Republican of Texas, and other leading members of the GOP argue that the regulations allegedly intended to protect taxpayers from having to bail out banks will restrict access to capital by the poor. According to an argument made by Jeff Carter, co-founder of Hyde Park Angels and former member of the Chicago Mercantile Exchange Board of Directors, not only will the increased cost of regulatory compliance associated with Dodd Frank increase, but Dodd Frank will restrict access to capital by the poor. These compliance costs will eventually be passed on to consumers. The main reason why the poor may find access more difficult may result from new bank capital requirements under Dodd Frank.
According to the American Bankers Association (ABA), all banks, whether large banks such as JP Morgan Chase, or your small, around the corner community bank may have to adopt certain capital requirements to support certain types of bank assets, especially if the United States adopts the capital requirements recommended by Basel III.
Basel III is the latest in a series of meetings sponsored by the Bank of International Settlements in Basel, Switzerland. Basel III aims to strengthen regulation and supervision of the banking sector by improving the sector’s ability to absorb shocks arising from economic and financial stress; improving risk management and governance; and strengthening banks’ transparency and disclosures.
What would increased capital requirements mean? In theory it would mean that there is more capital available to cover under-performing or non-performing loans. On the downside it would mean less capital available for underwriting loans and an increased cost of borrowing as less money is put into the financial system. In short, expect interest rates to rise.
The ABA also expects more product regimentation as a result of Dodd Frank. According to the ABA, what this means is that banks will find it much more difficult to tailor loan and deposit products to their customers since the Bureau of Consumer Financial protection (CFPB) favors “plain vanilla” products as part of its policy on disclosure simplification.
Given Mrs. Waters community bank background and ties and her position as ranking member on the House Financial Services Committee, she may be able to persuade regulators to carve capital requirement exceptions for smaller, community banks. Hopefully that’s one thing she’ll tell us.