Should Washington Go Easier On The Banks?

Stephen A. Schwartzman, CEO of private equity giant the Blackstone Group, has an op-ed in the Washington Post today arguing that lawmakers should go easier on the banks. He worries that their attitudes and intended regulation have already begun to harm lending and ultimately could prevent a swift recovery. While I agree with some of the points that Schwartzman makes, I disagree with his general assessment.

Uncertainty Is A Problem

Schwartzman begins by listing a bunch of uncertainties banks now face, due to potential regulatory proposals floating around Washington. He then says:

These uncertainties have severely hampered banking executives' ability to plan how to run their businesses or even know what their businesses may include. Predictably, bankers are reacting to this unprecedented uncertainty by becoming conservative and cautious. The result is that there is less lending and less credit available.

This is an interesting assertion, because it's not the claim that banks shouldn't be regulated. It instead contends that uncertainty is bad. So if tomorrow Congress passed a sweeping regulatory bill and the President signed, then Schwartzman's worry here would be eliminated. That would end the uncertainty. So if he's arguing that uncertainty is bad and lawmakers need to act decisively, then I agree.

Regulatory Worries Stifling Lending?

But does uncertainty cause banks to lend less? Some of the regulatory aspects being discussed that Schwartzman argues are reducing lending include: capital requirements, reserve requirements, taxes and compensation. Yet, as far as I can see, none of those should constrain lending.

Take capital and reserve requirements, for example. No one is talking about suddenly requiring banks to drastically ramp up capital at a moment's notice. Any new requirements would be instituted over a reasonable period of months or years, so that banks have time to comply. As a result, current lending shouldn't be affected -- banks will have time to raise additional capital when necessary.

Taxes and compensation are also odd worries for lending. Why would banks curb lending just because they might be taxed more or paid less? If anything, shouldn't that encourage them to lend and profit even more, so to counteract those potential changes?

Political uncertainty, while bad, shouldn't really constrain lending in this case. Bankers may blame regulatory reform as their reason for not lending, but general market uncertainty should have a lot more to do with it.

Banking Singled Out

Schwartzman then says banking shouldn't be singled out. He says the actors that caused the financial crisis were many. They included Fannie/Freddie, the Fed, bad regulators, the rating agencies, investors, mortgage brokers, etc. He's right.

And maybe I just spend too much time in the blogosphere, but all of those parties have been heavily criticized, at least by me and other journalists. And some of them are also included in Washington's regulatory effort. But I would argue that you have to start somewhere, and since financial institutions were at the heart of the crisis, needing billions of dollars in bailouts, they seem a logical place to start.

But I do agree with Schwartzman that the conversation should be constructive and efforts not punitive. While banks made mistakes, our economy needs their services and expertise. That's why I agree with Schwartzman that regulatory reform is necessary, but could be handled much better than it has been by Washington. The market needs certainty more quickly, and the regulatory measures should be designed to quell systemic risk not populist outrage.