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A Columbia University finance professor who has studied a controversial move to require banks to hold more capital on their balance sheets disagrees with claims by banks that the new regulations would hamstring lending activities.
Professor Tomasz Piskorski, a professor in the finance division of Columbia Business School, said higher capital requirements on aggregate lending by banks would be “relatively minor” under the Basel III endgame proposal being developed by federal banking regulators.
“The overall impact of raising capital requirements on aggregate lending may not be as substantial as commonly stated by banks’ CEOs and consumer advocates,” Piskorski said in an email to MarketWatch.
Putting more capital on banks’ balance sheets won’t necessarily have the effect that banks claim, partly because balance sheets are not as important to their lending activities as they used to be, he said.
Banks don’t hold all their loans on their balance sheets and typically sell many of them in the robust secondary market.
Moreover, banks are pulling back from many consumer-facing loans such as mortgages and car loans, as non-banking businesses step into those areas, he said.
Piskorski’s comments came as the Bank Policy Institute and the American Bankers Association released a 314-page comment letter, in response to the end of the comment period ended earlier this month on the so-called Basel III endgame proposal. Bankers have said the proposal would hurt the U.S. economy in the face of the macroeconomic challenges of the past year.
Read more: Fed’s Michelle Bowman talks up compromise as comments on bank capital requirements roll in
Also read: Fed cop Michael Barr defends higher capital requirements as bankers bristle
Piskorski agrees with regulators that higher capital requirements could help protect smaller and mid-sized banks, as presented in an academic paper he co-authored with three other professors in 2023.
Most of the risk in the banking system is currently concentrated among smaller banks with $500 million or less in assets.
If 50% of the uninsured depositors pull out their money from banks in a sample of 186 banks, the study showed that none of the largest banks of $250 billion or more in assets would fail, and only five banks with assets of $10 billion or more would fail.
Only four banks with assets of $5 billion to $10 billion would fail, the study said; 10 would fail with assets of $1 billion to $3 billion, 22 banks with assets of $500 million to $1 billion would fail and 143 banks with assets below $500 million would fail.
Piskorski said big-bank CEOs “have a bit of a point” that the current proposal targets the largest banks.
Recent academic research in the wake of the failure of Silicon Valley Bank and two other banks last year suggests that there is not much need to increase capital requirements for the biggest players, he said.
“[The] largest banks do not currently face significant insolvency risk,” he said. “The regulators instead should focus on smaller and mid-size banks.”
The analysis he conducted with his colleagues suggests that capital ratios for smaller banks could be increased by more than 5%, but for big banks “there is not that much ‘need’ to raise their capital requirements,” he said.
Piskorski has presented his finding with government regulators as well as in remarks he made at the Basel III roundtable by the Wharton Initiative on Financial Policy and Regulation held late last year.
Meanwhile, after the comment period on the Basel III endgame ended on Jan. 16, it’s expected to take federal regulators months to come up with a modified proposal.
Also read: FDIC approves proposed capital requirements for U.S. banks
