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Senator Warner: Big bank CEOs have an argument when it comes to the Fed’s proposed capital rules

Chief executives from the nation’s largest banks are warning Senate lawmakers, especially Democrats, that the Federal Reserve’s proposed higher capital requirements will harm consumers and the economy.

Senator Mark Warner (D, Va.) appears to be listening.

Warner, in an interview on Yahoo Finance Live (see video above) said that the banks have an argument this time — and that he’s been told by regulators there are a lot of revisions coming.

“Whenever there's a new regulation or rule, [the banks] always say the sky is falling. This time, though, I think they've got an argument,” Warner said. “I think that you've got the circumstance where interest rates are at a recent high, the idea of additional capital requirements and additional buffer beyond what's already in place will mean there'll be less capital available for lending.”

Warner’s comments come after the chief executives of the nation’s eight largest banks — including JPMorgan (JPM), Goldman Sachs (GS), and Wells Fargo (WFC) — testified before the Senate Banking Committee Wednesday, repeatedly saying in unison that the Fed’s proposed capital requirements will hurt consumers, first-time homebuyers, and the economy — and that changes need to be made to the proposed rules.

“If you have the same capital requirements increased by 20% to do the exact same activities you did yesterday, you have to get a higher return and that higher return will be borne by the customer base,” Bank of America (BAC) CEO Brian Moynihan told lawmakers.

“We hope the federal agencies will be open to changes and will review the industry’s comments thoughtfully,” added Morgan Stanley (MS) CEO James Gorman during his testimony.

Last summer, the Fed proposed raising banks' capital requirements by 16% and widening the scope of new requirements to institutions with as little as $100 billion in assets — an effort to include smaller banks like Silicon Valley Bank, which failed in March.

The proposal known as the Basel III endgame has been prescribed by the financial crisis-era Dodd-Frank Act for a decade now to put the world on equal footing. Banks argue the proposal would go beyond the Basel framework and require them to raise capital by 20% to 25% — making them hold 30% more in capital per loan compared with international standards.

WASHINGTON - DECEMBER 5: Sen. Mark Warner, D-Va., speaks during the Senate Democrats' weekly news conference in the Capitol on Tuesday, December 5, 2023. (Bill Clark/CQ-Roll Call, Inc via Getty Images)
Do the banks have a point now? Sen. Mark Warner speaks during the Senate Democrats' weekly news conference in the Capitol on Dec. 5, 2023. (Bill Clark/CQ-Roll Call, Inc via Getty Images) (Bill Clark via Getty Images)

Bankers warned Wednesday that the new capital requirements could make mortgages and loans to small businesses more expensive while also pushing up consumer prices and the cost of saving for retirement. They also cautioned the rules could hurt market functioning and liquidity.

Senator Warner says he’s been told by the regulators that they have a lot of revisions to the proposed capital requirements.“I'm going to be anxious to see how this plays out, but I do think they have some concerns that ought to be heard out,” he said.

At the same time, Warner says he’s frustrated that there are tools already on the books to deal with liquidity crunches and bank failures that aren’t being used, namely the discount window.

The discount window is essentially a short-term lending facility that was created to help banks with short-term cash crunches when other banks won’t lend to them. But it comes with a stigma because any bank that taps that is viewed as weak. Thus banks don’t like to use it.

Warner says one of the things he’s been exploring is a way to make using the discount window more desirable.

“Could I work with the banking community so they can use that window in a way that doesn't create a stigma, doesn't hurt their stock price, but also is a tool on liquidity that was set up in the first place?” said Warner.

Separately, Warner is also developing legislation that would look at tasking the Financial Stability Oversight Council — a task force composed of all the federal banking agency heads — with overseeing risks of artificial intelligence.

“AI right now, without even the next generation, could completely disrupt trust in public markets through deepfakes, the appearance of fake securities filings, or misinformation about products,” Warner warned.

Yahoo Finance's Jennifer Schonberger covers the Federal Reserve, cryptocurrencies, and the intersection of business and politics.