Back in 2019, three of the largest US regional banks successfully lobbied regulators to ease their capital requirements by excluding paper losses on their investment portfolios. Doing so, they claimed, would allow them to increase lending — thus supporting the American economy — and better manage interest rate risk.
As regulators consider rolling back those changes following the collapse of Silicon Valley Bank, a Financial Times analysis shows lending at the three banks — PNC, US Bank and Capital One — as well as lenders they have since acquired in fact rose more slowly than at rivals.
Loans made by the trio of banks collectively rose just 6 per cent in the three years from 2019 to 2022, less than half the 15 per cent jump industry wide. JPMorgan Chase, which was not exempted from the rules, increased lending by 18 per cent over the same period. Yet unrealised losses over the same period soared nearly 1,400 per cent to $40bn at the three banks after the Federal Reserve rapidly increased interest rates.
“These banks would have said anything to get the rules passed,” said Scott Siefers, a bank analyst at Piper Sandler, who covers US Bank and a number of other large lenders.
The Fed is considering whether to reverse the 2019 change that allowed large regional lenders to fully exclude any market losses in their bond portfolios from their capital calculations. Critics argue that the regulatory relief enabled them to artificially bolster an important gauge of financial health, pointing to the fact that SVB failed in part because of such losses.
Lenders are pushing back, saying that reversing the rule could intensify the current bout of banking turmoil. In an echo of their 2019 entreaties, they also argue that doing so could limit their ability to make loans.
“If you changed them back, I literally don’t think it would matter,” said PNC’s chief executive William Demchak, repeating a commonly held view among bankers who argue that the regulatory change is not to blame for recent stresses. “The problem is if they did it overnight it would restrict lending.”
An immediate change is not on the cards, according to the Fed. In response to a query from the Financial Times, the US central bank said: “Any change the Federal Reserve may make to bank capital rules would not be effective for several years because it will go through the standard notice and comment rulemaking process and be subject to an appropriate phase-in.”
Some former regulators warn that giving banks a long runway to comply with tougher capital rules could prove counter-productive. “There is a trade-off in allowing too long of a transition period,” said Jeremy Kress, a former lawyer in the banking regulation and policy group at the Fed who is now at the University of Michigan. “You’re allowing risks that you’ve identified to go unaddressed for a longer period of time to give the industry time to adapt.”
The 2019 change at issue was ushered in by Randal Quarles, a Donald Trump-appointed vice-chair of supervision at the Fed, and followed bipartisan legislation aimed at rolling back some of the rules enacted in the wake of the 2008 financial crisis. PNC, US Bank and Capital One were among its most enthusiastic backers.
The three banks clubbed together to fire off letters to regulators at the Fed, Federal Deposit Insurance Corporation and Office of Comptroller of the Currency, claiming that the change would allow them “to meet the credit needs of businesses, consumers and local governments”. And they sent eight of their top lawyers to meet FDIC, Fed and OCC officials in May of that year, according to Fed records.
US Bank and PNC argued that their lending growth would have been higher had the FT calculations not included the banks they acquired. Capital One declined to comment.
PNC’s Demchak added that his institution had been prudent in not increasing lending too quickly in the years after the pandemic, having predicted that customer balances would eventually fall. “When all those deposits, tied to stimulus money, came in, we assumed that what came in easy would go out easy,” he said. “And we left more money at the Fed to manage that.”
US Bank said: “We participated in the [2019] public comment process when asked and were supportive of the changes.”
Critics contend that what the 2019 change actually did was encourage the three banks — along with more than two dozen smaller lenders including SVB — to dramatically increase their holdings of government bonds and other securities. When rates were at rock bottom lows they bolstered their profits and when they rose, causing paper losses, their capital ratios were unaffected.
It also gave the banks more leeway to make capital-depleting deals, with PNC acquiring the US business of BBVA for $11.6bn in 2021, and US Bank snapping up MUFG Union Bank.
Earlier this month, hedge fund HoldCo Asset Management, which is betting that US Bank’s shares will fall, said in a report that the 2019 regulatory rollback prompted the lender to grow quickly in a risky interest rate environment. HoldCo calculates that US Bank’s capital ratios, when factoring in likely regulatory changes, are just above 6 per cent, and below the 7 per cent minimum threshold required of the largest banks.
US Bank said its capital ratios have met expectations and that plans are in place to boost them this year and next.
Additional reporting by Sujeet Indap and Antoine Gara