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Can Banks Handle Another Financial Crisis?

Piggy Bank 2 BHOn the same morning that Rep. Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee, unveiled the GOP’s plan for replacing Dodd-Frank, Senate Banking Committee Chairman Richard Shelby (R-Alabama) posed a question to his committee at a hearing on banking regulation and liquidity.

“The question we must ask ourselves is, are banks in a position today to withstand another major financial crisis?” Shelby asked the committee.

The issue of whether or not banks are capitalized enough to withstand a crisis came to the forefront in April when the Federal Reserve and FDIC jointly rejected the “living wills” (plans as to how banks would enter bankruptcy without causing widespread damage to the U.S. financial industry) of Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street, and Wells Fargo.

Shelby lamented to the committee that regulators “appear to think that more is better” when it comes to regulation, regulators, and spending, stating that “[U]nnecessary layers of complexity can create undue burdens for banks big and small, a more complex regulatory system could actually lead to an increase in systemic risk.”

Shelby continued, “How can we be assured that regulators are focused on the right measures when there are so many overlapping, and even counterintuitive, rules for capital and liquidity?  I worry that they will be so focused on the myriad details that they will, once again, be unable to see the forest for the trees.”

Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee, addressed the complaint from the largest banks that requiring them to hold more capital puts them at a competitive disadvantage.

“I worry that they will be so focused on the myriad details that they will, once again, be unable to see the forest for the trees.”

Richard Shelby, Chairman, Senate Banking Committee

“[T]here is evidence that U.S. banks’ higher capital has actually been a competitive advantage—for example, the president of one of the largest U.S. banks said in February that our banks benefitted from moving quickly to raise more capital,” Brown said. “Still, the recent living wills results show that several of our nation’s largest banks still have deficiencies and shortcomings in their capital and liquidity, and most of them could not fail without threatening our financial system. That’s why we have these regulations, and it’s why we shouldn’t merely fight to preserve the status quo, we also need to move forward.”

Witnesses at the hearing were Professor Hal Scott, Nomura Professor and Director of the Program on International Financial Systems, Harvard Law School; Dr. Marvin Goodfriend, The Friends of Allan Meltzer Professor of Economics, Tepper School of Business at Carnegie Mellon University; Professor Heidi Mandanis Schooner, Professor of Law, Columbus School of Law, The Catholic University of America; and Dr. Paul H. Kupiec, Resident Scholar, American Enterprise Institute.

The industry will find out just how capitalized the largest banks in the country are when the Fed releases the results of its stress tests on June 23 and June 29. Earlier in June, the Fed announced there would be tougher capital requirements for the nation’s largest financial institutions.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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