Before we get to the question that Marty addressed about whether it's going to
affect lending or not. First of all, tell us why did Michael
Barr think you need to do it at all? What's the issue that they're
addressing? So a couple of things.
One is we still haven't fully implemented Basel three in the United
States, So there's been a lot of conversation for a long time around
Basel three end game and helping to bring the U.S.
into conformity with some of the the international standards they've agreed
to. But the Michael Barr has gone further by
Qanbar very shortly after taking office, that he's going to engage in a broad
holistic review of capital requirements. There's a whole host of requirements
that were put into place in Dodd-Frank, modified somewhat since then, and he
wanted to take a more comprehensive look of how they work together, how well they
were working and the changes that needed to be made.
So what the speech was a summary of what he sees as the problems and how he wants
to proceed. And it is going to mean more capital for
all of the large banks. Let's go beyond the banks and the
effects of this potentially and go back again to what Marty Zweig said, what
Randy Corales is saying. Now.
I talked to the Brian Moynihan of Bank of America two or three weeks ago, and
he said it's a very simple thing for Bank of America, for every 100 basis
point increase in the capital requirements.
It means $150 billion less in loans. Does that sound right and does that
really have an effect on the real economy, as it were?
Again, a bank CEO is going to know better than I am exactly how those trade
offs are happening. Take everything with a little bit of a
grain of salt. There are meaningful trade offs, but two
important qualifications. So first, when banks pull back the first
hard, it's hard to know how much they're actually going to pull back on Monday
when they do pull back on lending. Another challenge that arises is not
that that lending doesn't happen, that lending moves outside of the banking
space to less regulated domains. So a lot of what we have to pay
attention to is where these loans are being made.
But the other core thing to note is not all lending is of equal social value.
Right. What we really want is more lending
during periods of distress and probably a little less lending when everything's
going really well and assets are potentially inflated.
And so one of the things we know from history is that better capitalized banks
tend to be more willing to make loans during periods of distress, which is
when we most need that lending. So my guess is vice chair borrowers
response would be even if we have a little less lending during the good
times, we're going to have more lending when we most need it during the bad
times in ways that are going to make us overall better off.
Kate, I'm not going to ask you to predict the future necessarily, but is
this possibly a candidate for one of those times where we need a little more
help? We're just going in a bank earnings
season now, this week and next week, and there's a lot of anticipation about
watching exactly default rates, delinquency rates, reserves being taken,
particularly in the consumer areas. A lot of concern that we're going into
one of those difficult periods. What are you expecting?
What are you looking for? I think I'll be looking really closely
at what we actually see in terms of the projections.
Right. So we want to know what the default
rates are looking like, what is the rate at which they're accelerating.
But a lot of what we want to see is what are the projections that the different
banks are making regarding how much additional pain they see coming down the
road. I think we're certainly going to see
some challenges. And the question really is going to be
magnitude. You know, we're helped a little bit by
some of the recent inflation data and hopefully some stabilization of the
economy, which would mean a balancing out and a little more of the soft
landing. But that can't be guaranteed.
So it's still going to be a lot of noise in all the figures.
But part of what we're going to be trying to figure out is, is there a
possibility not just on the employment side, but the employment side as it
interacts with the lending and the credit of of the ability of getting
through all of this without too much pain?
Kate, when you and I last spoke on Wall Street, where it was in the aftermath of
Silicon Valley Bank and some other failures, and the concern was really
with some of the communities, smaller banks, even regional banks being under
stress. Do we have a better sense today of
whether they have, in fact, been under stress?
Are they in danger? I think there clearly ongoing risk with
regional banks. One of the ways that we really see that
is the decisions they're making about funding.
If you look at the regional banks, there have been two trends.
One, they are increasingly relying on federal home loan banks, which is kind
of known as a lender of last resort as a source of funding.
It's cheaper than at times market sources, but a lot more expensive than
deposits. And they've also increasingly been
relying on types of deposits that are more expensive and more flighty.
So if we look at kind of what they're doing to fund their operations, there
are certainly suggestions that there might be more pain to come.
I want to go back to something you referred to earlier, that insofar as the
big banks can't lend as much money, it doesn't.
Mean, that money doesn't get lent. It just goes to other places.
Takes me into what we call non-banks. You and I have talked about this a
little bit before. Where are we with that and what is the
risk, the systemic risk from that? Because even though they're not
necessarily banks as such, they deal a lot with banks, they bank with banks.
And so if they come into a lot of stress, presumably it could affect the
banking system. It could certainly affect the banking
system. And we sometimes forget this because we
ended up having so many problems with banks in 2008 and 2009.
But really, actually, the great financial crisis started in the non-bank
sector. And so it is clearly an ongoing source
of concern. The Treasury Department has proposed
guidance outstanding and we've extended the notice period.
We built an analytical framework for how we think about risks outside of the
banking system and then also a revised framework for how they would go about
designating non-banks systemically significant.
So I'd say one of the most important things about the revisions, we're going
to see if Barr's proposals go forward, as I would expect they will, is really
the importance of the Treasury and more generally the Financial Stability
Oversight Council really staying on top of the migration of activity outside the
banking system. That's already happening.
That's going to continue to happen and making sure we have the right framework
in place for understanding and really responding to those risk.