The fight by big banks against higher capital standards came to the Congress on Thursday where Republicans held a hearing to air Wall Street concerns about regulation and its impact on profits.
Little more than two years since taxpayer bailouts were needed to firm up banks' flimsy balance sheets, governments on both sides of the Atlantic are moving to force the banks to hold more capital and be better prepared for future crises.
Banks are resisting, however, and remarks made at a U.S. House of Representatives hearing showed they have support among many Republicans and some Democrats, with the 2007-2009 credit crisis growing fainter in the rear-view mirror.
Citing concerns about international competitiveness and the availability of credit in a fragile economy, JPMorgan Chase Chief Risk Officer Barry Zubrow told lawmakers: "The regulatory pendulum clearly has now begun to swing to a point that risks hobbling our financial system and our economic growth."
Final decisions on new global bank capital standards are still months away. The standards are being developed through the Basel III process being coordinated by the Financial Stability Board, an international body based in Switzerland.
The United States is committed to full implementation of the Basel III accords, once they are finalized, both "at home and abroad," U.S. Treasury Undersecretary for International Affairs Lael Brainard told the House Financial Services Committee.
She added that it was important to make sure that capital rules be internationally consistent.
Similarly, Federal Reserve Governor Daniel Tarullo said the Fed is seeking alignment of the Basel III capital rules with those imposed in the United States under last year's Dodd-Frank financial oversight law.
At a minimum, under the Basel pact, banks will have to hold top-quality capital equal to 7 percent of their risk-bearing assets. Analysts expect the largest financial institutions to have to hold additional capital of about 3 percent.
Financial industry officials also complained at the hearing that new derivatives rules under Dodd-Frank will put U.S. firms at a disadvantage because other countries have yet to implement their own strict standards.
Regulators said they are also pushing for derivatives rules to be implemented internationally. Brainard said she visited London and Frankfurt in the last two weeks to make the case for an international agreement on margin standards for derivative trades that do not go through a clearinghouse.
John Walsh, a top U.S. banking regulator, expressed concerns at the hearing similar to those raised recently by large banks, which fear that higher capital requirements will crimp their lending and reduce their profits.
"Attempting to wring risk out of the banking system through the device of high capital requirements must be weighed against the costs ... and potentially lower economic growth," Walsh told the House hearing.
Walsh is acting U.S. Comptroller of the Currency. He said his agency supports requiring large banks to hold a "moderate" amount of additional capital.
A witness for the union movement urged regulators to resist calls to relax their stance.
"Deregulatory whipsawing of the kind recommended today by my fellow witnesses may temporarily increase some bank profits. But the price will be another cycle of economic crisis and job loss," said Damon Silvers, associate general counsel of the AFL-CIO labor group.
The Dodd-Frank banking reforms approved last year required the Federal Reserve to come up with capital requirements for banks with more than $50 billion in assets and for other large financial firms deemed important to the smooth functioning of financial markets and tapped for stricter Fed supervision.
World regulators, as part of the Basel III process, are deciding how much of an added buffer to impose on the largest, most internationally active banks.
The Securities Industry and Financial Markets Association, an industry lobbying group, "disagrees with the discussion underway by the Financial Stability Board which would impose an additional capital charge for globally systemically important financial institutions," said SIFMA President Tim Ryan in remarks prepared for the hearing.
BACHUS: DON'T OVER-REGULATE
"If we over-regulate and ignore the plans of the rest of the world, then I fear we will push capital, industry and jobs right out of our country," Republican Representative Spencer Bachus, chairman of the committee, said at the hearing.
Earlier this month, Tarullo got the banks' attention when he said the Fed might require the largest banks to hold between 8 percent to 14 percent in total capital. He backed away from that on Thursday.
He said the range was what different studies had produced, not necessarily what would be adopted.
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