Policy

OCC Chief Denies Increased Federal Regulation Has Hurt Banks

One of the nation’s top banking regulators is pushing back against critics of the Obama administration’s response to the financial crisis and subsequent recession, warning efforts to roll back heightened capital, liquidity and leverage requirements for banks could jeopardize the economic progress made over the last six years.

“Now is not the time to change course,” Comptroller of the Currency Thomas J. Curry said last week in a speech at the Harvard Kennedy School of Government.

He said the “basic lessons” of the financial crisis demonstrated “the value of strong capital and its corollary danger of excessive leverage, the need for ample liquidity, and the importance of effective supervision.”

Curry said the U.S. banking system is now “as well capitalized as any in the world,” crediting this achievement to himself and “the concerted effort of regulators and bankers who recognize that stronger capital means stronger banks.” He said it is now widely understood and accepted that “banks should grow their capital during healthier economic periods so that it is available during a downturn.”

The comptroller said the Federal Reserve’s annual stress tests offer proof U.S. banks have made “steady progress” is building up their capital buffers since the financial crisis, noting banks have posted a $700 billion increase in common equity capital since the first of 2009.

Curry said the stress test results indicate that, even under severe economic conditions, the 33 largest banks would continue to be well-capitalized and be able to continue lending during a recession.

The comptroller also pointed to enhanced liquidity for American megabanks as another positive development stemming from regulators’ post-crisis efforts. He said liquid assets for U.S. global systemically important banks is up more than $400 billion “on average,” versus just $130 billion on average for G-SIBs in other countries.

Curry noted capital at U.S. G-SIBs is also up more $70 billion compared with only $16 billion on average for the largest banks in other nations.

U.S. megabanks are also required to meet “more stringent” leverage requirements in the post-crisis era, Curry said, with regulators now subjecting large banks to stricter leverage ratios that limit the amount of leverage they can employ.

“The high standards here in the United States have made our banks stronger in absolute terms and in comparative terms,” he said. “U.S. banks are better today because of the rigor of the new standards and how quickly we implemented them.”

But despite the apparent progress, Curry said critics have incorrectly claimed the new regulatory regime restricted lending and hurt U.S. competitiveness.

“But that’s not’s the case,” he countered. “The strength of U.S. banks has improved their competitiveness, not weakened it.”

Curry said revenue for the top five U.S. banks in 2015 was more than double than that of their European counterparts, “and U.S. banks’ pre-tax profits dwarfed their European counterparts’ $4.2 billion.”

Capital standards helpful

The comptroller also largely dismissed arguments that heightened regulatory capital standards “restrict lending and place a drag on the economy.” While calling such concerns “legitimate,” Curry said the financial crisis provided an “unfortunate reminder of the devastating consequence that can be inflicted on the public when banks fail to hold capital levels commensurate with their risks.”

The comptroller defended the tougher capital standards by noting regulators have placed much of the burden on big banks “that were closer to the epicenter of the crisis.”

“Because we scaled our enhanced capital requirements to apply primarily to the largest most complex banks, the quality and volume of capital is increasing in those institutions” while, at the same time, “we are seeing lending grow and profitability return,” he said.

Although Curry did not identify any of the regulators’ critics by name, his Sept. 15 remarks came just two days after Republicans on the House Financial Services Committee, chaired by Rep. Jeb Hensarling of Texas, pushed through a 500-page bill to repeal much of the 2010 Dodd-Frank Act (PL 111-203) with no support from Democrats. The committee approved the so-called Financial CHOICE Act (HR 5983) by a 30-26 vote.

Under one of the bill’s provisions, banking organizations that maintain a leverage ratio of at least 10 percent and have a composite CAMELS rating of 1 or 2 may elect to be exempted from a number of regulatory requirements, including the Basel III capital and liquidity standards.

In a GOP summary of the legislation, Republicans complained “excessive regulatory complexity — embodied by the Dodd-Frank Act, the Basel capital accords, and other post-crisis regulatory initiatives — produces a less resilient financial system, cements the competitive advantages enjoyed by ‘too big to fail’ firms, and harms economic growth.”

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