Senator Elizabeth Warren (D-Mass.) called on regulators Wednesday to be tougher on US banks, asking them to prevent dominant institutions from getting even bigger through mergers of smaller rivals.
"We have a system in place for bank regulators to block mergers that would be bad for the economy," Warren said at a Better Markets conference marking the 15th anniversary of the fall of Wall Street giant Lehman Brothers in 2008.
"We just have to remind the regulators of their responsibilities and hold their feet to the fire when they ignore them."
A debate about the appropriate aggressiveness of banking regulators is intensifying a decade and a half after a housing bust and Lehman’s bankruptcy triggered the biggest financial crisis since the Great Depression, forcing Washington bailouts of several giant banks.
That US aid branded certain institutions in the minds of many as "too big to fail" and kickstarted a long, national debate about which banks should be regulated more aggressively and how.
The focus on this subject in Washington took another turn in 2023 as the banking industry experienced one of its most challenging years since 2008.
Three sizable lenders went down in the spring, including Silicon Valley Bank and First Republic, as depositors pulled their money in a mass exit. First Republic and Silicon Valley Bank were the second- and third-largest bank failures in US history.
Regulators sold the bulk of First Republic to JPMorgan Chase, a deal Warren has criticized for making a big institution even bigger. JPMorgan is the No. 1 bank in the US as measured by assets.
To Warren, one lesson from 2008 is that it is dangerous to concentrate so much power in so few hands. Allowing big banks to acquire smaller banks will only increase those risks, in her view.
Warren on Wednesday specifically called out Treasury Secretary Janet Yellen and Acting Comptroller of the Currency Michael Hsu for being open to more bank mergers.
“Despite all that we have learned since 2008 and despite President Biden ordering regulators to update merger guidelines, Acting Controller Hsu and Treasury Secretary Yellen have still signaled openness to more mergers,” said Warren.
Several big bank CEOs this week are also pushing back against regulators for another reason, saying they are going too far. Specifically, they cited new proposed capital rules they claim would restrict lending and pose a danger to the US economy.
JPMorgan CEO Jamie Dimon on Monday called the new US proposal requiring banks to bolster their capital buffers "hugely disappointing," warning that it could push more lending into private credit markets.
"I would love to know what they really want to accomplish," Dimon said Monday, referring to regulators behind the proposal that was unveiled in July.
Banks affected by the changes proposed in July will see an aggregate 16% increase in their capital requirements. Regulators say the increase would primarily affect the largest banks and that most have enough capital already to comply. Capital is the buffer banks have to hold to absorb future losses.
These changes are part of the US version of an international accord known as Basel III that was developed following the 2008 crisis by the Basel Committee on Banking Supervision.
Goldman Sachs CEO David Solomon also didn’t hold back when he spoke Tuesday about the proposed change.
"I don’t think these rules make sense," he said.
Several bank trade groups also sent a letter Tuesday to the Federal Reserve, the Federal Deposit Insurance Corporation, and the OCC asking them to “re-propose” the rule, arguing that the initial proposal “relies on data and analyses that the agencies have not made available to the public.”
Warren on Wednesday called for another change to how banks are scrutinized that also draws on lessons she said were learned in 2008.
She asked Congress to pass legislation that would allow regulators to claw back executive bonuses and compensation in the event of a bank failure.
The Senate Banking Committee in June voted on a bipartisan basis to pass a bill dubbed the RECOUP Act that would allow the FDIC to claw back compensation from senior executives at failed banks going back two years.
The bill is a lighter version of legislation introduced by Senator Warren, also with bipartisan backing, in the wake of SVB's collapse in March. The full Senate will now take up the bill.
“In a broken system, like the one we have, we know who gets ahead no matter who they've harmed. And that's Wall Street executives. That was true in 2008. And it is true today,” said Warren.
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