MIS-REGULATION: Hang on. What?
“U.S. regulators are preparing to force large banks to shore up their financial footing, moves they say will help boost the resilience of the system after a spate of midsize bank failures this year.
“The changes, which regulators are on track to propose as early as this month, could raise overall capital requirements by roughly 20% at larger banks on average, people familiar with the plans said. The precise amount will depend on a firm’s business activities, with the biggest increases expected to be reserved for U.S. megabanks with big trading businesses.
“Banks that are heavily dependent on fee income—such as that from investment banking or wealth management—could also face large capital increases. Capital is the buffer banks are required to hold to absorb potential losses.” [Emphasis added.]
Please tell me I’m missing something. The reason banks hold high levels of capital is to protect them from heavy credit losses. But the bank failures this year had nothing to do with credit problems; they were old-fashioned bank runs. No amount of extra capital would have prevented them. For that matter, I’m not sure why fee-dependent banks need to carry extra capital, either. Those banks just take in lots of fees! Where’s the risk, exactly? Sometimes I feel like I’m living on a different planet.