CRISIS MANAGEMENT — It’s been 15 years since the 2008 financial crisis, and Washington is still fighting about the best way to prevent another banking meltdown. Lawmakers fretted on Capitol Hill today about a new proposal from bank regulators that’s designed to wrap up unfinished business from the crisis — most notably by requiring big financial institutions to hold more loss-absorbing capital in case of another blow up. To be clear, regulators have already done a lot to beef up bank defenses in the last decade and a half. Whether they’ve done enough is a different question. Democrats like Rep. Maxine Waters (D-Calif.) have said the mini banking crisis earlier this year, when Silicon Valley Bank fell apart and brought two other regional banks down with it, shows they haven’t gone far enough. “We need to strengthen capital requirements for our largest banks, given the risk that they pose,” she said at the hearing. But these types of regulations are also really complex, so it’s not just about how much capital banks are required to have. It’s also: are there useful bank activities that will be curtailed as a result of this rule ? This has been the steady drumbeat of Republican allies of the banking industry, but they’re also winning over some Democrats. Congress pushed for stronger capital requirements “to strengthen the banking industry’s ability to withstand stresses and shocks,” Rep. David Scott (D-Ga.) said today. “Since then, our banking system has successfully navigated very difficult periods, including the recent 2020 Covid economic shock. But now I’m very concerned with the unintended economic consequences of this proposed rule and its potential impact on our banking institutions as they engage in critical market activities.” Their complaints get at the complexity of the role that banks play in our society. Banks are where we put our money, and they can use that money, in an ideal scenario, by investing in useful things — helping people buy houses, helping companies grow, facilitating trading in markets where firms and governments borrow money, and so on. (Of course, we know from prior experience that banks also do lots of irresponsible stuff as well.) They’re at the heart of capitalism, but also they’re deeply interconnected with the government. For the biggest, most interconnected megabanks, there is a dedicated team of examiners that advise on the strategic direction of the bank to ensure both that it is “safe and sound” — that is, commercially viable — and that it isn’t endangering the financial safety of the U.S. But how much of that should be enforced through hard and fast rules versus individualized supervision? And how much, as is often professed by people on both sides of the aisle, can the gaps simply be solved by more capital? Banks can fund a lot of their operations through borrowed money, including but not limited to deposits. Capital, in contrast, is money that comes from shareholder money and profits, effectively a skin-in-the-game requirement that means some of the funding banks use has to actually be their own. Higher capital requirements ideally should ensure that banks can absorb unexpected losses on their own without causing a broader headache for the financial system, but it also can make taking risks, even productive ones, more expensive. Bank supervision is considerably more strenuous than it was before the 2008 crisis. The 2010 Dodd-Frank Act, often maligned for doing either too much or the wrong things, really did radically alter the direction of bank regulation and make banks way less reliant on debt. They have way more cash to handle crises. Meanwhile, supervisors seem to have missed the forest for the trees on the problems that ultimately plagued these failed banks. And regulators seem to have largely thrown out the post-Dodd-Frank rulebook that was supposed to dictate how to deal with a big failed bank. So, as the country faces an ignominious anniversary on Friday — the 15-year anniversary of the epic collapse of investment bank Lehman Brothers — it’s fair to say the system is more resilient than it was. It’s not as clear whether it’s resilient enough. Welcome to POLITICO Nightly. Reach out with news, tips and ideas at nightly@politico.com . Or contact tonight’s author at vguida@politico.com or on X (formerly known as Twitter) at @vtg2 .
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