Five Facts on Financial Regulation & Large Banks

9 Apr 2019

Setting the Record Straight on Some Misguided Myths

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Today, the U.S. banking system operates within a financial regulatory framework that sets strong guideposts within which banks of all sizes, including large, financial institutions, operate.

This framework was established after the global financial crisis and led to regulatory and supervisory reforms that for the past 10 years have helped to shift the nation’s economic landscape and put the banking sector on historically strong footing.

As Former Federal Reserve Gov. Daniel K Tarullo, one of the key architects of the post-crisis regulatory framework put it “… after being the epicenter of a global financial crisis, today the United States has the strongest and most diverse financial system of any major economy in the world.

That same sentiment has been echoed by Martin J. Gruenberg, a member of the FDIC Board of Directors and previous FDIC Chairman, who said, “… large U.S. financial institutions, whose vulnerability necessitated extraordinary public assistance during the crisis, are now among the strongest in the world.”

And, as Federal Reserve Chair Jay Powell said just last month, America’s banks are, “…far better capitalized and better aware of their risks and more liquid than they were before the financial crisis. So, they’ll be more resilient in difficult states of the economy.”

These comments were further underscored by the independent Federal Reserve’s inaugural Financial Stability Report that found, Reforms undertaken since the financial crisis have made the U .S . financial system far more resilient than it was before the crisis.”

Still, some misguided myths have caused confusion and the Forum would like to set the record straight.

Let’s take a look:

MYTH:  Washington is cutting regulations for large banks and unwinding what it set out to fix 10 years ago.

FACT:   The post-crisis regulatory framework remains intact.

  • Enhanced supervision, such as annual stress tests, and improved risk-management practices at the largest banks has promoted safety and soundness within the system.
  • Today, these banks face significantly higher risk-based and leverage capital requirements. Large banks must also meet quantitative liquidity standards and have a federally approved plan for a rapid and orderly resolution in the event of material financial stress.
  • The Brookings Institution recently noted in a report, “The Trump administration has halted growth of regulation that imposes costs, but so far has left the existing regulatory framework largely in place.”

MYTH:  Federal regulators are lowering capital requirements for large banks.

FACT:   Capital requirements and related buffers for the largest banks have increased substantially and banks are maintaining capital far above regulatory minimums.  

  • Minimum risk-based capital requirements and related buffers have more than doubled for Forum member institutions. Based on the 2018 stress tests, which were far worse than the financial crisis itself, the hypothetical losses would have consumed only one-fifth of the available capital now maintained by these institutions.
  • This was highlighted in the Fed’s  recent Monetary Policy Report  to Congress, which said, “As of the third quarter of 2018, regulatory capital ratios for the U.S. global systemically important banks remained well above regulatory requirements…”
  • And, when you drill down further, these banks stand ready to absorb losses so that they can continue to operate in the face of financial shocks. Forum members are also required to maintain other loss-absorbing cushions that bring their overall loss absorbing capacity to $1.7 trillion.

MYTH:  Stress tests for banks are being weakened.

FACT:   Stress tests remain more severe than the actual financial crisis.

  • Earlier this year, the Federal Reserve issued the scenarios for the 2019 stress test, which all Forum members will undergo.  These scenarios once again reflect a hypothetical severe recession far worse than the financial crisis itself, including a
    larger increase in unemployment and a deeper recession than last year’s test.
  • To date, Forum member institutions have completed eight years of stress tests and are continually demonstrating the ability to absorb unprecedented losses and serve their customers during a highly severe downturn.

MYTH:  Big banks are only getting bigger and the industry is more concentrated than in 2008.

FACT:    Forum members’ share of total assets has decreased in the past 10 yearsThat’s because while banks of all sizes have gotten bigger during the past decade, Forum member institutions have grown at a much slower pace than other financial institutions.

  • We have a highly diverse banking system, with over 5,000 banks of different sizes.  The banking industry is not concentrated, especially when compared to a wide range of other industries such as automobile manufacturing or telecommunications.
  • To support our nation’s $20 trillion economy, which serves consumers and businesses each and every day, America must have banks of all sizes including large, well-capitalized global banks.

MYTH: Banks do not care about their consumers.

FACT:   Banks exist to serve their customers, including consumers.  And consumers overwhelmingly are happy with their banks.

  • In a recent survey conducted by Morning Consult, 84 percent of the more than 2,000 people surveyed rated their bank “excellent,” “very good,” or “good.”  And Forum member banks offer products and services that meet the needs of a variety of consumers.  Bank of America, Citi, JPMorgan Chase, and Wells Fargo all have low-cost, low-fee, no-overdraft products certified by the Cities for Financial Empowerment Fund as meeting its standards for safe and appropriate bank products that help bring people into the financial mainstream.

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The Financial Services Forum is an economic policy and advocacy organization whose members are the chief executive officers of the eight largest and most diversified financial institutions headquartered in the United States.  Forum member institutions are a leading source of lending and investment in the United States and serve millions of consumers, businesses, investors, and communities throughout the country. The Forum promotes policies that support savings and investment, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.

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