Requiring banks to maintain bigger cushions of capital would curb U.S. lending less than many experts and policymakers have suggested, according to a Pew Charitable Trusts study released today.
The higher capital requirements that the Obama administration is seeking are aimed at preventing another financial crisis like the one last fall and winter, which many experts have blamed in part on current capital regulations criticized as too lenient. The rules require banks to maintain a cushion representing a percentage of their total assets to protect against loans that go bad, or investments that fail.
The Pew report found that if those requirements rose on average from 6 percent to 10 percent, rates on a typical bank loan might rise by around 0.2 percentage points — an increase the report said is much lower than many have suggested.
“These results suggest that tougher capital requirements can powerfully aid the stability of the system without doing significant damage to lending or the economy,” said the report’s author, Douglas J. Elliott, a fellow at the Brookings Institution, a Washington think tank.
Critics fear stricter requirements will make it more difficult for businesses and individuals to affordably secure loans, as well as reduce interest rates earned on bank deposits and erode bank stock prices.
The Pew study found that “the volume and pricing of bank lending would not be affected in a large way” from higher capital requirements.
U.S. banks, the study argues, “could adjust to higher capital requirements on loans through a combination of actions that would not wreak havoc on the system.”
Banks, the report said, “have a variety of levers to pull which should allow them to make the transition.”
The Obama administration’s proposal involves stricter international bank capital requirements for companies deemed to be so large and interconnected they pose a threat to the overall stability of the financial system.
President Obama wants an agreement by countries to implement the measure by the end of 2012. The administration is hoping to get broad agreement among major countries so that U.S. financial institutions wouldn’t be put at a disadvantage if their capital standards are raised to higher levels than their competitors face in other nations.
The study was conducted as part of the Pew Charitable Trusts’ Financial Reform Project, which is evaluating the U.S. financial system. (AP
