Obsession with Capital Overshadows Other Key Reforms

By Barbara A. Rehm

There is a downside to policymakers’ infatuation with capital — and I’m not talking about industry claims that credit will evaporate. The real problem is everything else in the Dodd-Frank Act that’s getting short shrift while federal regulators fascinate over the power of capital rules to reform the banking business. The list of sidelined goals is long: curbing interconnectedness; taming derivatives; capping leverage; rebuilding liquidity; banning proprietary trading; enhancing prudential standards; and slowing concentration. Sure, requiring higher capital may have spillover effects, helping to accomplish some of those objectives. And, yes, the federal agencies have made some progress on some of these rules. But clearly regulators have consciously chosen to toughen capital rules over actually implementing many of the provisions in Dodd-Frank that were designed to prevent a repeat of the 2008 financial crisis. And at best, these behemoths will shrink slowly over time. (And I’m not convinced that’s such a great outcome either. The economy needs a banking industry that’s growing, not hunkering down.) Karen Shaw Petrou, the co-founder and managing partner of Federal Financial Analytics, says it’s too soon to assess the impact higher capital ratios will have on the largest banks. “The first thing they are going to do is fight,” she says, “and the second thing they are going to do is model.”