From Wall Street on Parade, October 12:
On Monday, Michael Barr, the Vice Chair for Supervision at the Federal Reserve, addressed a contentious issue in a speech before the American Bankers Association’s annual convention in Nashville. The topic was why federal banking regulators have proposed higher capital levels for the largest U.S. banks, those with assets over $100 billion.
As we reported on September 20, there has been aggressive pushback on the proposal from large banks, their lobbyists and their trade associations. (Community banks are not impacted by the proposal.)
During his speech, Barr put a staggering dollar figure on the destruction to the U.S. economy that could materialize from another major financial crisis. Barr said this:
“Research suggests the costs of a financial crisis are sizable. While estimates vary widely, the cumulative loss in economic activity is consistently estimated to lie above 20 percent of annual GDP—and in some estimates up to 100 percent of GDP. For the United States, these estimates imply losses from financial crises of $5 trillion to $25 trillion based on current GDP. The macroeconomic benefit of increased capital comes from reducing the likelihood of such a costly event. Better capitalized banks are better able to absorb losses and continue to lend to households and businesses through times of stress, which in turn, helps to ensure that we have a healthy and strong economy.”
Banks could have been building up their capital over the years by simply retaining earnings. Instead, the largest banks have been using tens of billions of dollars in earnings each year to buy back the bank’s own stock. That puts an artificial prop under the bank’s share price and allows the top executives to get fat bonuses for good share price performance.
In June 2020, reporters at Bloomberg News dropped a bombshell, revealing that the four largest U.S. Banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — had spent more on dividends and share buybacks than the banks had actually earned from January 2017 through March of 2020. The reporters wrote this....
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Sooooo, is that a no to fully reserved banking?
