New Bank Regulations Will Hurt Small Businesses and Middle-Class Borrowers the Most

The Federal Deposit Insurance Corporation seal outside its headquarters, in Washington, D.C., on March 14, 2023. Manuel Balce Ceneta/AP Photo

Commentary

The rapid succession of bank failures last spring clearly spooked federal regulators at the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, and bank depositors. The bad decision-making at Silicon Valley Bank, Signature Bank, and First Republic Bank caused the regulators to implement emergency life preserver measures to banks and conjured up memories of the 2008 financial crisis.

But as the saying goes, in Washington, a crisis is always a terrible thing to waste, and so we are seeing a reflexive response for more government intervention. No surprise that Senate Democrats immediately pounced into action, calling on federal regulators to add another layer of rules including a complex increase in capital requirements on the U.S. banking system. Reacting quickly, the Federal Reserve, with the Office of the Comptroller of the Currency and the FDIC, released a joint proposal for the U.S. implementation of the “Basel III regulatory framework.” These are complex rules, but in a nutshell, these rules would increase the amount of money that banks hold in reserve by 25 percent.

Sorry, this won’t stop occasional bank failures of the hundreds of banks in the United States. What it will do is choke off lending to small businesses, homebuyers, and consumers who need loans.

The theory behind higher capital requirements is that banks will have more money in reserve to offset the losses from loans that go sour. Bank reserve requirements are a good safety precaution for sure. We don’t want banks to take on too much risk and then rush to a taxpayer safety net every time they are in trouble. But many well-respected government and private studies have found that U.S. banks as a group are not undercapitalized, nor were the banks that failed.

Those banks simply made a series of bad investment and lending decisions. Ironically, some of the bad decisions, such as holding on to “safe” low-interest-paying Treasury bonds, which then lost market value when the Fed finally begin raising interest rates, were a direct result of federal regulations.

The FDIC and the Fed are authorized to maintain the health and safety of the United States’ banks. Their job is to avoid 1930s-style bank runs that could do great damage to our financial system. Here’s the problem: These new rules would punish banks that are financially sound and shrink the available pool of loans available to homebuyers, small businesses, and lower-income families. Less lending to qualified borrowers would mean less economic growth and less financial stability.

A forthcoming Committee to Unleash Prosperity study co-authored by David Malpass, the former president of the World Bank, and myself finds several negative—unintended—consequences of these rules based on the best research findings:

First, they will reduce the available pool of capital by an estimated $100 billion to $150 billion a year.

Second, the reduction in lending will reduce economic activity and thus shrink annual GDP by as much as 0.6 percent.

Third, because foreign banks are not subject to these regulations, U.S. banks will lose competitiveness to foreign banks.

Fourth, and most importantly, it’s the little guy who gets squeezed out of the lending market. Small businesses and lower-income families are most likely to be the ones whose loans are rejected as a result of these new rules.

It’s simple: Lending is the oxygen supply that keeps our economy vibrant and competitive. Cutting it off, as the Basel rules are proposing, won’t make our economy safer but will put it at greater risk.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.