Nearly three years since the financial crisis began, lawmakers appear consumed again with a very precrisis topic: Is overregulation driving financial institutions overseas?
Lawmakers at a House Financial Services Committee hearing Thursday peppered regulators with that question and said requirements of the Dodd-Frank Act, combined with tougher international capital and liquidity rules, may damage U.S. standing as a global financial leader.
"I think failing to examine the aggregate cost of compliance with Dodd-Frank could lead to job losses and, in the worst case, a downgrade of the United States as a financial center," Rep. Shelley Moore Capito, R-W.Va., told top regulatory officials. "I would encourage you all to move forward with caution, and to work with your counterparts from around the globe to ensure that America remains a financial leader."
At the same time, lawmakers appeared worried that they might seem to be calling for weak capital standards or lax regulatory policies.
"We all agree that banks should be sufficiently capitalized … because we want to avoid bailouts," said Rep. Spencer Bachus, R-Ala., the committee's chairman. "We want to avoid taxpayer funding and the shock that it does the economy."
Rep. Jeb Hensarling, one of the most conservative members of the panel, said "there is wide agreement that capital and liquidity standards were mostly inadequate going into the financial panic of 2008, and clearly there is a convergence of opinion they must be raised."
"But I think the question, particularly in this hearing, that has to be addressed, is what is the cumulative impact of raising those capital standards under Basel III?" Hensarling said. "What will be the impact of the extra capital standards to be assessed against the SIFI institutions just imposed in the 2,000-plus pages of Dodd-Frank? I am uncertain that we know the answer to that question."
For their part, regulators insisted they were cognizant of the trade-offs involved. Obama administration officials said that the U.S. must be a leader in enacting tough reforms of the financial system, but they insisted that other countries will follow suit, preventing firms from fleeing overseas in the hopes of weaker oversight.
"There are some who would argue that the United States is moving too fast on financial reform, that we should slow it down, wait to see what other countries implement," said Lael Brainard, undersecretary of the Treasury for international affairs. "I don't agree. By moving first and leading from a position of strength, we are elevating the world's standards to ours."
Brainard said that policymakers were not choosing between stability and growth, as critics charge. "I think the real point here is that we will have much healthier growth if, in fact, we put in place a safe and sound financial system," she said.
But lawmakers were dubious that other countries would follow the U.S. lead. While Basel III is an international agreement, many note that it is left to individual countries to implement the accord, which could result in discrepancies. The U.S., meanwhile, is alone in enacting certain reforms as part of Dodd-Frank, including the Volcker Rule prohibiting proprietary trading and new derivatives regulations designed to make swaps more transparent.
Lawmakers said other countries do not seem to be adopting their own tough regulatory regimes.
"Back then, it was more like, 'Well, you lead here in the U.S., and we'll follow,' for the rest of the world," said Rep. Steve Pearce, R-N.M. "Now, it's 'You lead here in the U.S., and we'll sort of pick and choose as to what we're going to follow with.' "
Much of the discussion Thursday turned on a proposed capital surcharge for banks that are systemically important. Several banks, led by JPMorgan Chase, have argued the surcharge, which likely will be around 3%, goes too far.
Several lawmakers criticized Fed Gov. Dan Tarullo for raising the prospect that the surcharge could go as high as 7%. During the hearing, Tarullo acknowledged the attention his remarks earlier this month had received, and said he was referencing a number proposed by analysts here and abroad that have tried to estimate how high the surcharge should be.
"That's not to say that that's the one that gets eventually adopted," Tarullo told lawmakers, referencing the 7% figure. "There are reasons to calibrate any such range. You've got to choose a number somewhere, and that's what's going on right now in at the international process."
The Basel Committee on Banking Supervision is expected to release its proposal on the surcharge in July.
"What's important is not to lose sight of the cost of not acting here," Tarullo said.
Acting Comptroller of the Currency John Walsh said his agency also supported a capital surcharge but that it should be "modest."
Brainard, seeking to allay fears that surcharges could vary by country, said a final agreement should be "comparable across countries and mandatory in every jurisdiction."
Even Rep. Barney Frank, the panel's top Democrat, raised concerns with the capital surcharge, noting that Tarullo had suggested it is needed to offset the perception that such large firms are "too big to fail."
Regulators agreed Dodd-Frank is supposed to end the perception of "too big to fail," but insisted that would take time as the market and bankers adjust to new rules, including those that give the Federal Deposit Insurance Corp. the power to unwind large institutions. " 'Too big to fail' was well ingrained into market thinking precrisis," said FDIC Chairman Sheila Bair. "It's been with us for too long." Tarullo said higher capital requirements and ending "too big to fail" go hand in hand. "I've regarded the resolution authority and the capital surcharge as complementary, self-reinforcing mechanisms which can move us along the road to what I think everybody … agrees what should be the end, which is eliminating any 'too big to fail' reality or perception," he said.