More generally, banks will not satisfy customers’ needs in a financial crisis as they have in the past. While many banks actively lent in 2008, the new capital requirements will cause banks to hoard capital with an eye toward satisfying the regulators, rather than meeting the needs of their customers. The largest banks’ need to preserve capital will be intensified because of rules requiring them to revalue assets as they become riskier as well as decreasing their capital from unrealized securities losses. With respect to liquidity requirements, even if banks believed that regulators wanted them to drop below mandated levels, they will not want to lend because dipping below specified liquidity requirements would signal financial vulnerability to clients, investors and industry analysts.
If banks reduce their lending, customers will have little prospect of finding other funding in a declining market. While certain nonbank financial institutions would be a potential source of credit in a downturn, their overall lending capacity would not be sufficient to cover the shortfall. Indeed, corporate America’s fear that credit will not be available in times of financial distress has led many larger companies to retain unprecedented levels of cash. While certain companies have the scale and cash flow to be their own bankers, small and medium-size businesses, and the less sophisticated, do not have this luxury.
Indifference to the need for liquidity in a crisis has reached such a state that some legislators have proposed further limiting the Federal Reserve’s emergency lending powers. In a financial crisis, only the Fed, as the lender of last resort, might stand between our economy and financial catastrophe. We must leave the Fed with the flexibility to provide liquidity in order to stop a financial panic. While moral hazard is a legitimate risk, limiting the Fed’s ability to enhance systemic safety is, as former Fed Chairman Ben Bernanke has said, like shutting down the fire department to encourage fire safety.
Given the rapid expansion of bank regulation and growing liquidity concerns, regulators need to revisit whether they have overshot the mark. They need to assess the costs of liquidity regulation and take into account the perspective of consumers, businesses and other stakeholders who will depend upon access to the banking system in a crisis. This reassessment should explore countercyclical liquidity and capital strategies that encourage banks to support their customers in a crisis.
It is five years since Dodd-Frank became law, and time for a fresh look at its impact. We need a holistic regulatory review of the cumulative effect of postcrisis capital, liquidity and trading rules on the availability of credit and liquidity. Any review needs to be transparent, coordinated domestically and internationally and proactively engage a broad base of regulators, industry leaders, economists and consumers.
No one is looking to jettison the benefits of stronger capital and liquidity requirements. We just need to be careful that we don’t create bankers who, in words attributed to Mark Twain, take their lent umbrella back the minute it begins to rain.
Mr. Schwarzman is chairman, CEO and co-founder of Blackstone.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]
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