Two of the nation’s most high profile former regulators have plenty to say about efforts to weaken bank capital rules.  Specifically, they write in a recent Wall Street Journal op-ed:

The idea that lowering bank capital requirements boosts lending is urban legend. Ample research shows that banks with higher capital levels lend more, not less, through business cycles. Highly leveraged banks are vulnerable to the shocks that inevitably occur during a downturn. Because of the major banks’ size and scope, that vulnerability undermines the stability of the economy.

However, they note, that recent proposals aim to lower capital requirements, even as the economy continues to grow.  This, they argue, would comprise poor policy:

Changes in capital rules should, if anything, boost capital buffers during growth periods. The proposals the Fed is currently considering would not only weaken them but rely less on the leverage ratio—a simple and understandable metric capping the ratio of debt to equity in bank funding that has proven a strong predictor of banks’ financial health. Instead, they would assess banks’ stability using “modeled risk,” which failed to predict the last crisis.

Moreover, banks, they note, are not prone to lending up “freed” capital.  Instead, they distribute the “excess” to shareholders, or use it to subsidize the expansion of their trading and other nonbank activities.

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