[ Why are civil rights groups and Black mayors concerned with the
profits of giant financial institutions?]
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THE CURIOUS PARTNER IN BIG BANKS’ DRIVE TO WEAKEN CAPITAL RULES  
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David Dayen
November 29, 2023
American Prospect
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_ Why are civil rights groups and Black mayors concerned with the
profits of giant financial institutions? _

Proposed capital rules for big banks are mostly about limiting risky
bets on securities and derivatives trading, not small-business or
mortgage lending, (AP photo).

 

The recent scandal involving sexual harassment at the Federal Deposit
Insurance Corporation, according to my colleague Robert Kuttner
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only came to light after the big banks sought to disable a new rule
the FDIC and other financial regulators have been working on to raise
capital requirements
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institutions with more than $100 billion in assets. Setting capital
reserve rules at the appropriate level of risk definitely impacts big
banks by reducing the leverage that they can use to spin up profits,
but protects the public, and arguably the banks themselves, by
providing a cushion to guard against securities losses and deposit
runs. Bank executives and lobbyists are more worried about the former
than the latter.

FDIC chair Martin Gruenberg is seen as unlikely to resign
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the wake of the harassment scandal, which means that the agency will
have a full complement of Democratic appointees on the board to
advance the capital rules. But that doesn’t mean the banks have
given up. They’ve turned to an old standby: third-party advocacy
groups that weigh in on their behalf.

When a think tank or research organization, with the imprimatur of
independence, appeals to regulators to change policies in ways that
benefit banking interests, it carries more weight. That’s why big
banks hand out a lot of money to these groups, in the hopes that it
leads to favorable policy recommendations. So Wells Fargo giving
a $50 million grant
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the National Association for the Advancement of Colored People (NAACP)
does not necessarily come without strings, even if they appear
invisible at first glance.

In my research and reporting during and after the financial crisis, a
strange connection would routinely pop up, where headline civil rights
organizations and big banks would advocate for the same things. When I
looked into the background, I would often find large monetary
contributions. That’s what got my spider sense tingling when I saw
some of the public comments on the capital rules.

Hollies Winston, the mayor of Brooklyn Park, Minnesota, a suburb of
Minneapolis that’s majority-minority and about 30 percent Black
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submitted a comment
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that “raising capital requirements for banks … could potentially
hinder the ability of Black-owned businesses to secure the financing
they need to start, grow, and sustain their operations.” Angela
Lang, executive director of Black Leaders Organizing for Communities
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Milwaukee area, cited an Urban Institute analysis in her comment
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saying that the proposal would hurt African American borrowers “who
have faced decades of redlining, discriminatory lending practices, and
other forms of economic disparities.” Other comments
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this have been submitted.

Public comments do matter on complicated rules like this. The banking
regulators extended the comment period
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which was supposed to close this Thursday, to next January.

Neither Winston nor Lang responded to the _Prospect_’s questions
about whether they were persuaded or contacted by any civil rights
organizations to comment on the new rules. But their interest in a
capital reserve rule that affects only 32 banks in the entire country
was curious. So was the random shout-out to the Urban Institute.

A research organization founded by Lyndon Johnson
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solve nagging social and economic policy problems, particularly racial
gaps. In the case of the bank capital rules, Urban has taken the
position that they will harm access to credit for low-income
borrowers, which aligns directly with the claims of the largest
lobbying organizations from the banking industry.

The Urban Institute happens to receive millions of dollars per year
from large banking organizations. Among its list of donors
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JPMorgan Chase and Wells Fargo gave more than $1 million in 2021 (the
last year disclosed), Bank of America and Citigroup’s charitable
foundation gave between $250,000 and $499,999, U.S. Bank gave between
$100,000 and $249,999, and Morgan Stanley gave between $25,000 and
$49,999. That’s six of the top seven banks in the country by assets.

Most of the impact of the capital rules hits the four banks above $700
billion in assets— JPMorgan, Wells Fargo, Bank of America, and Citi,
all high-level donors to the Urban Institute. While banks between $100
billion and $700 billion in assets will only see their capital levels
rise by a nominal 6 percent, for banks over $700 billion, the number
is 19 percent
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In funding disclosures, the Urban Institute insists that it maintains
full independence. “No funder shall determine research findings or
the insights and recommendations of our experts,” the
organization states on its website
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Urban and the big banks is nothing new. Consistently, Urban
researchers have concluded
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access to credit is more valuable than regulations to ensure the
safety and soundness of the financial system. Whether this alignment
is fully independent or whether big banks give to the Urban Institute
out of confidence that their researchers will release favorable
reports cannot be known.

In a response to multiple questions from the _Prospect_, Urban
Institute spokesperson Linda Argueta said, “Urban does not have an
agenda, ideological or otherwise, nor do we take institutional
positions on issues. However, researchers have autonomy to pursue new
ideas, and they are empowered and supported to share their own
evidence-based views and policy recommendations.”

OVER THE PAST DECADE-PLUS, big banks have closed branches
disproportionately
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Black communities, received downgrades in their ratings
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lending to low-income communities of color, earned enormous sums
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overdraft fees on disproportionately minority depositors at the height
of the COVID-19 pandemic, and settled allegations
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racial discrimination in lending during the subprime boom. So why
should communities of color worry about their profits?

The Urban Institute analysis
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written by Laurie Goodman and Jun Zhu in September, focuses in
particular on how increased capital requirements would increase
charges on loans with a high loan-to-value (LTV) ratio. While this may
sound intuitive since those are riskier loans, to Goodman and Zhu,
this means that banks will react by writing fewer of those loans, and
that low- and moderate-income borrowers, as well as Black and Hispanic
borrowers, would be disadvantaged.

What this fails to point out is that the capital rules would not
affect non-bank mortgage lenders at all. The three biggest mortgage
lenders in America
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non-banks, as well as 15 of the top 25. Non-bank mortgage originators
make more loans to low-income borrowers than large banking operations.

Even Urban’s own analysis says that only 52 percent of mortgage
originations made by banks would be affected by this rule, which only
impacts the largest banking institutions. Of those big-bank mortgage
loans, only 13 percent of them had high loan-to-value ratios. But you
have to cut that down even further to account for all the non-banks.
In sum, only a fraction of mortgage loans will be influenced by these
new rules.

Indeed, one could argue that expanding access to risky credit is
ultimately harmful to minority communities. We do know that Black and
Hispanic mortgage borrowers in particular were most affected
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orgy of risk-taking in the financial crisis, with much higher levels
of dispossessions and lost equity. That was true even if they did not
get a mortgage origination from a big bank, since the Great Recession
led to mass unemployment and lost wages.

The idea that higher capital rules hurt Black and Hispanic borrowers
is a rehash of what financial institutions have long claimed about
access to credit. The organization Center Forward, a centrist group
funded by corporate interests
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has run advertising campaigns declaring that there are “unintended
consequences
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the capital rules. “Because banks will have to hold more assets on
hand that cannot be loaned out, the availability of credit across our
economy will shrink,” Center Forward alleges.

As former FDIC chair Sheila Bair has written
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capital requirements do not force banks to lend less. “Capital
requirements simply govern the ratio of banks’ funding that must
come from equity versus debt. Banks can fund a loan with equity
capital as easily as with leverage,” she wrote in the _Financial
Times_.

Though banks have complained that the rules impose higher capital
standards in the U.S. than internationally, such “gold plating”
has long been a competitive strength of U.S. capital regulation, not a
weakness. Meanwhile, when banks recently weakened regulatory oversight
on large regional banks below international standards, the result was
the Silicon Valley Bank collapse, which harmed access to capital far
more than any regulation might have.

The bank capital proposal is mostly about limiting risky bets on
securities and derivatives trading, not small-business or mortgage
lending. Having struck out playing an inside game with financial
regulators, big banks have gone public
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their frustrations, and it seems they are enlisting sympathetic
communities in their drive for corporate profits.

_David Dayen is the Prospect’s executive editor. His work has
appeared in The Intercept, The New Republic, HuffPost, The Washington
Post, the Los Angeles Times, and more. His most recent book is
‘Monopolized: Life in the Age of Corporate Power.’_

_The American Prospect is devoted to promoting informed discussion on
public policy from a progressive perspective. In print and online,
the Prospect brings a narrative, journalistic approach to complex
issues, addressing the policy alternatives and the politics necessary
to create good legislation. We help to dispel myths, challenge
conventional wisdom, and expand the dialogue.  _

_American Prospect, Inc., is a 501(c)(3) nonprofit corporation
headquartered in Washington, D.C.  You can support our mission with a
subscription or a tax-deductible donation.  _

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