Tougher Regulation of Bank Leverage Is Good

A blog about business and economics.
July 2 2013 6:17 PM

Tougher Regulation of Bank Leverage Will Be Costly To Banks, Not To You

Lloyd Blankfein wants more debt.

Photo by ERIC PIERMONT/AFP/Getty Images

Word on the street today from Federal Reserve governor Donald Tarullo is that the Fed is going to impose tougher capital requirements on the eight largest banks in the United States—6 percent rather than the 3 percent required by the international Basel 3 agreement.

That's still too low for my taste, but certainly a step in the right direction. And naturally it has the bank lobby howling:

The measures outlined by Tarullo could be costly, said William Sweet, a former Fed lawyer and a partner at Skadden, Arps, Slate, Meagher & Flom LLP in Washington. “Any change of the leverage would be so far outside what Basel III proposed that it would be a dramatic impact,” Sweet said, with U.S. banks at a “distinct disadvantage” when competing head-to-head against lenders based in other nations and governed by the weaker global standard.

It's important to be clear about what "costly" means in this context. Normal businesses simply can't finance themselves with 3 percent capital and 97 percent debt. The interest rates would get exorbitant. The ability of banks to profitably finance themselves with that much debt reflects the availability of direct and indirect guarantees of bank debt, from the FDIC coverage ofy your checking account up to TARP and beyond. It is true that it will be costly to American banks to need to compete with European banks that are receiving a higher level of subsidy. But that's not the same as saying it's costly to the American people. American citizens will actually be the indirect beneficiaries of European governments' largess.

The question then becomes whether the United States has a kind of strategic interest in building up high finance as a global export industry. For much of the 1990s and 2000s era, I think that was the implicit goal of American financial regulation policy. But in retrospect, it didn't turn out so well for us and the countries that were even more deeply invested in that model (think: UK, Ireland, Iceland) are doing even worse. I say it's time to turn away from that path, and what Tarullo is talking about is a sensible step.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Students Aren’t Going to College Football Games as Much Anymore

And schools are getting worried.

Two Damn Good, Very Different Movies About Soldiers Returning From War

The XX Factor

Lifetime Didn’t Think the Steubenville Rape Case Was Dramatic Enough

So they added a little self-immolation.

Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

Why a Sketch of Chelsea Manning Is Stirring Up Controversy

How Worried Should Poland, the Baltic States, and Georgia Be About a Russian Invasion?

  News & Politics
Sept. 20 2014 11:13 AM -30-
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
Sept. 20 2014 7:27 AM How Do Plants Grow Aboard the International Space Station?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
Brow Beat
Sept. 20 2014 3:21 PM “The More You Know (About Black People)” Uses Very Funny PSAs to Condemn Black Stereotypes
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Bad Astronomy
Sept. 20 2014 7:00 AM The Shaggy Sun
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.