Editor’s note: This column was included in the Sept. 19 version of The Pulse, a weekly BankBeat newsletter sent to subscribers.
Esther George, the president of the Federal Reserve Bank of Kansas City from 2011-2023, told bankers in Iowa earlier this week that the nation’s largest banks still get special treatment when it comes to capital rules. She criticized the practical result of the regulatory risk weighting system, which is that community banks end up holding proportionately higher levels of capital than the largest banks.
“I am not a fan of risk-weighted capital,” she said. “I know it is very controversial but I will just tell you I continue to track something the Kansas City Fed puts out that shows, apples to apples, how much equity are small banks holding, regional banks, all the way to global banks. You will find the smallest banks are holding multiples more equity capital, that is, institutions that can be closed on a weekend relative to institutions that we have deemed too-big-to-fail.”
She was echoing a theme her predecessor at the KC Fed, Thomas Hoenig, frequently addressed, which is that too-big-to-fail puts community bankers at a significant competitive disadvantage.
Of course, it is not exactly clear who is in the TBTF club — certainly it includes the six bank holding companies with more than $1 trillion in assets. But what about the next 30-largest institutions, which would make up holding companies with assets of more than $100 billion but less than $1 trillion? What about those with fewer than $100 billion in assets, a fair question given the Fed considers any bank with more than $10 billion to be a Large Holding Company?
The lack of clarity is problematic. George noted that she often hears people talk about “one industry,” but the practical reality is there are two — one made up of institutions subject to traditional market forces, and the other with implied (if not overt) federal protection.
Tiered regulation takes some of the sting out of the disparities, but it would be pollyannaish to believe that institutions subject to traditional market pressures can compete on a long term basis with institutions that enjoy government backing. Community bankers should not lose sight of this fact and should continue to press lawmakers to resolve it.
