Although banks have become better capitalized since the financial crisis, there are capital levels that are counterproductive, ABA President and CEO Frank Keating said in yesterday's Financial Times. "When regulators set rules, they should not be surprised that banks naturally adjust to the incentives they created," he said. "Yet too often banks get blamed for making rational decisions based on the rules that have been set by their regulators."
Bankers believe in maintaining appropriate capital levels, Keating explained. But "capital comes at a cost -- both to banks and the economy at large in the form of foregone lending as institutions shrink to meet extreme capital-to-asset ratios," he said. Keating pointed out that loan levels have fallen over the past five years as U.S. banks have increased capital by over 21 percent.
"To tell banks they need more capital and then complain that some borrowers are not getting funding is a political statement, not an economic one," Keating added. "It's time to find the right capital rules for the risks taken, regardless of an institution's size or where it is located."