In Dante’s Inferno, those consigned to Purgatory – the theological equivalent of the Port Authority bus terminal – don’t mind it nearly as much once they realize that beneath them lie the damned in true and lasting torment. Bankers probably felt about the same as they contemplated two recent decisions: the big-bank global surcharge and the FRB’s interchange rule. They hated them a whole lot, but – now humbled by the sight of what could have befallen them – a mood of humility seems to mark the financial behemoths.
To be sure, the bankers were softened up before they came to appreciate how narrowly they escaped worse than they got. With regard to the surcharge for global systemically-important banks (G-SIBs), FRB Gov. Tarullo grabbed the industry by the short hairs. A week or so before the Basel meeting that decided the fate of the G-SIBs, Mr. Tarullo opined that the biggest banks posed so grave a threat that a capital surcharge of seven percent – double the already high Basel III minimum – might cut them down to size. When Basel decided instead on a systemic surcharge of no more than 2.5 percent for G-SIBs absent any prospective mergers, the result was a capital charge of less than half that initially feared. Banks had pressed for no capital surcharge but, once they were threatened with a whopper, some took comfort that the actual standards might not be all that bad.
And, so it was also with the FRB’s interchange rule. Bankers were stunned that the Durbin Amendment made it into Dodd-Frank, but after it did, they felt sure they could work the Fed around to a rule that did as little as possible to daunt debit-card fees. The FRB, though, took a stiff view of what the law said. As a result, it initially proposed a rule that whacked about $20 billion a year from issuers. On Wednesday, when the Fed reluctantly approved its final rule, the fee limits were softened and the resulting loss was whittled to $10 billion a year.
That’s a large return for a lot of hard work, just as the drop in the G-SIB surcharge reflects a lot of advocacy. Does it make either of these standards make sense? That’s of course an entirely different question. We think we know the answer: not so much on either count. That the rules do less damage than they could have does not make them any more sensible.
Bankers surely did not warrant life in the VIP lounge of free champagne and deferential service that all too often marked the pre-crisis regulatory framework. It’s hard to blame them now for liking it a lot then and for still being in shock that someone has not just taken away the hors d’oeuvres, but also the comfy chairs, carpet and all the other appurtenances of high flying. But, banks still fill the vital credit-intermediation purpose and, if they don’t do it, shadow banks will while they still live it up in the VIP lounge.