Banks Feel The Regulation

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Given all the troubles banks have had over the past year, it should come as no surprise that they will be held to higher standards going forward. The Wall Street Journal reports today that banks are beginning to feel the sting of that additional regulation. It says:

The Federal Reserve and the Office of the Comptroller of the Currency, two of the primary U.S. banking regulators, have issued more of the so-called memorandums of understanding so far this year than they did for all of 2008, according to data obtained from the agencies under Freedom of Information Act requests.


At the current rate of at least 285 so far, the Fed, OCC and Federal Deposit Insurance Corp. are on track to issue nearly 600 of the secret agreements for the full year, compared with 399 last year. Memorandums of understanding can force financial institutions to increase their capital, overhaul management or take other major steps.

Here's a chart that WSJ includes to demonstrate the change:

bank regulation.gif

As I mentioned this action should shock no one. The WSJ article also states that banks are not thrilled. That also should shock no one. More stringent capital requirements mean that they won't be able to do as much lending. Therein you have the paradox of the government wanting stricter regulation of the banks, but also wanting them to lend more. You can't have it both ways.

So which should it choose? Given the financial debacle that we witnessed in 2008, I think more stringent capital requirements wouldn't hurt. After all, it would have been really nice not to have gone through that whole financial crisis thing.

And what caused that crisis? Oh, too much lending. So even though Congress might think more lending is a good thing, too much lending isn't. While it's important that banks find a reasonable market equilibrium for the price of credit, that price should be higher than it was in 2006. So if more stringent capital requirements raise that price accordingly, then that might not be such a bad thing.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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