Big Banks Fight Too-Big-to-Fail Rule With Surprising Allies

The battle over bank regulations is heating up on Capitol Hill, with an unusual coalition forming to oppose efforts to require big banks to hold more cash reserves. The campaign has sparked a debate among Democrats and has even brought together unlikely allies in the fight against stricter regulations.

An Unlikely Coalition

Liberal stalwarts like Senator Elizabeth Warren find themselves on the same side as Wall Street-minded Democrats, rural state lawmakers, civil rights leaders, and consumer groups. Even NFL fans in targeted markets have seen TV ads discussing the issue. This coalition is working to shut down an effort known as Basel III Endgame, which aims to prevent another “Too Big to Fail” moment.

The Core Issue

At the heart of the debate is whether certain banks should be required to hold more cash reserves to protect against insolvency. After three banks failed last year, there has been increased interest in ensuring the survivability of financial institutions. The Basel III Endgame proposal, although it wouldn’t have saved those failed banks, has gained attention. These ideas were originally included in the Dodd-Frank financial reforms of 2010 but were delayed due to the Covid-19 pandemic.

Opposition from Banks and Beyond

Unsurprisingly, banks are strongly opposed to these tighter controls. However, the opposition extends beyond Wall Street. An analysis of comment letters sent to regulators revealed that nearly 9 out of 10 negative responses came from voices outside of the banking sector. Critics argue that increased cash reserves mean less money available for small businesses and homebuyers, making it more challenging and expensive for them to access funds. This dynamic has made internal politics tricky for Democrats, especially in an election year.

The Arguments

Supporters of the regulations argue that reducing risk would lead to more lending, as there would be fewer threats to institutions. Some unexpected supporters of this position include Senator Sherrod Brown, the Democratic chairman of the Senate Banking, Housing, and Urban Affairs Committee, and Representative Maxine Waters, a California Democrat. They believe that opposing the requirements would only serve to enrich bank executives.

Who is Affected?

The proposed regulations would apply to financial institutions with more than $100 billion in assets and smaller ones specializing in trading assets. Community banks would be exempt, and the rule wouldn’t take effect until July 2028. However, the majority of opposition to the proposal has come from various groups, including black-owned businesses, construction trades unions, clean energy associations, and agribusiness coalitions. These groups argue that the regulations would harm communities of color, infrastructure projects, renewable energy investments, and agricultural end-users.

Political Pressure and Implications

The banking industry has launched a significant political campaign to put pressure on lawmakers, particularly those on the Senate Banking Committee. The powerful lobbying voices behind this campaign hope to derail anything that could impact their bottom line. Democrats, who are already worried about their electoral prospects, are reluctant to see unions, retirees, black entrepreneurs, farmers, and Wall Street all aligned against them. This opposition poses a significant challenge for regulators, especially those appointed by Democrats.

In the end, the outcome of this battle remains uncertain. Federal Reserve Chairman Jerome Powell has shown openness to changing the current proposals in response to overwhelming opposition. Treasury Secretary Janet Yellen has remained neutral in the public debate. As the coalition against Basel III Endgame grows, it becomes increasingly challenging for regulators to ignore the voices of banks, unions, and other groups affected by the proposed regulations.