I'd like to take you back to a simpler time — to 2016.
Back then, the Republican and Democratic primaries were both contested, and candidates were throwing policy ideas out there to see what gained traction. One of those, at least on the Democratic side, was the question of
Into that policy scuffle stepped
That vision was ultimately consummated several months later in something called the
Fast forward to today, a time when the question of how high bank capital ought to be is still very much alive, albeit in a slightly different form. The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency issued a bank capital proposal, known as Basel III endgame, which ostensibly adjusts risk weighting of a bank's assets and methodologies of ascertaining capital, but in effect would raise capital on the largest banks by between
Comparing the
But there's another difference between the Minneapolis Plan and Basel III endgame, and that is that the Minneapolis Plan included a separate prong that would impose a tax on nonbank financial companies — including hedge funds, mutual funds and nonbank intermediaries — of between 1.2% and 2.2%, depending on systemic risk.
January 19, 2024 1:45 PM
"We acknowledge that a byproduct of imposing higher capital requirements onto banks may be the migration of risky activity from the banking sector to nonbank financial firms, where capital requirements are lower, if they exist at all," the plan said. The nonbank tax "would effectively make the cost of funds roughly equivalent between large banks and nonbanks."
Again, these two proposals aren't shooting at the same target, so pointing out that no such nonbank dimension exists in the Basel III proposal isn't fair. But they are comparable in so far as they are both contemplating where bank capital ought to be, and if the Minneapolis Plan at least acknowledged the potential for higher bank capital to push activities outside the banking perimeter, some similar acknowledgement should be made in the form of a concrete vision for the nonbank financial sphere if bank capital is going to increase in a meaningful way, even
Federal Reserve Vice Chair for Supervision Michael Barr did acknowledge the growth of nonbank intermediation
"We should monitor the migration of activities from banks to the nonbank sector carefully, but we shouldn't lower bank capital requirements in a race to the bottom," Barr said. "In times of stress, banks serve as central sources of strength to the economy, and they need capital to do so."
Fair enough. But if a level playing field between banks and nonbanks is a desirable policy outcome and bank capital shouldn't go down, then there should be some kind of a vision of making nonbanks' lending inputs look more like those of banks.
The
But try they must, because the entire idea that higher bank capital makes the financial system safer rests on the assumption that U.S. commerce runs through the banking system. Otherwise, we're back to where we were in 2016 — or, really, 2008. That's not a plan anyone should get behind.
As an expert and enthusiast, I have access to a wide range of information and can provide insights on various topics. While I don't have personal experiences or emotions like a human, I can provide factual information and answer questions based on available data.
Regarding the concepts mentioned in the article you provided, let's break them down:
Neel Kashkari and the Minneapolis Plan
Neel Kashkari, the former Republican candidate for Governor of California and current President of the Federal Reserve Bank of Minneapolis, proposed a plan in 2016 to address the issue of "Too Big To Fail" banks. He argued that the existing regulations, such as the Dodd-Frank Act, were not sufficient to prevent another financial crisis. Kashkari's plan suggested two options: either breaking up the large banks into smaller, less risky entities or treating them as "public utilities" with significant capital reserves to prevent failure.
Basel III Endgame
The article mentions the Basel III endgame, which is a bank capital proposal issued by the Federal Reserve, Federal Deposit Insurance Corp. (FDIC), and Office of the Comptroller of the Currency (OCC). This proposal aims to adjust the risk weighting of a bank's assets and methodologies for determining capital requirements. It is expected to increase capital requirements for the largest banks by 16% to 30%.
Comparison between Minneapolis Plan and Basel III Endgame
While the Minneapolis Plan and Basel III endgame both address the issue of bank capital, they have significant differences. The Minneapolis Plan focused on raising risk-weighted capital minimums for banks with more than $250 billion in assets and included a separate prong that proposed imposing a tax on nonbank financial companies. On the other hand, Basel III endgame adjusts risk weighting and methodologies for determining capital requirements. The capital impact of Basel III endgame is estimated to be lower than the risk-weighted requirements under the Minneapolis Plan.
Nonbank Financial Companies
The Minneapolis Plan included a proposal to impose a tax on nonbank financial companies, such as hedge funds, mutual funds, and nonbank intermediaries. The purpose of this tax was to create a level playing field between large banks and nonbanks by making the cost of funds roughly equivalent.
Financial Stability Oversight Council (FSOC)
The article suggests that the Financial Stability Oversight Council should play a role in addressing the potential migration of activities from banks to nonbank financial firms. The FSOC is responsible for identifying and addressing risks to the financial stability of the United States. It rescinded a Trump-era guidance concerning the systemic risk designation process for nonbanks, but the question of how the council would designate activities rather than institutions as systemically risky remains unanswered.
In summary, the concepts discussed in the article include Neel Kashkari's Minneapolis Plan, the Basel III endgame proposal, the comparison between the two plans, the taxation of nonbank financial companies, and the role of the Financial Stability Oversight Council in addressing potential risks in the financial system.