Bank executives warned House lawmakers that their institutions are losing ground to lenders facing less stringent regulation, particularly requirements that they keep a minimum amount of capital to cover losses.
Executives from seven of the largest banks in the U.S. testified Wednesday before the House Financial Services Committee and told lawmakers capital requirements raise the costs of loans, depress their lending and could have negative consequences in a recession.
“When you think about the economy and where it goes to create risk versus leverage, honestly, there's more of that outside the banking system than inside,” said Brian Moynihan, CEO of Bank of America. He said nonbank lenders have too little capital on hand relative to the lending they’re doing.
“The amount of private credit, not only in mortgages but every single asset class, more than half of it's sitting outside our industry,” Moynihan said, attributing the shift to the greater regulation faced by banks compared to other lenders.
Lawmakers said they were particularly concerned about mortgage lending moving outside of the banking sector.
“The greatest investment that takes place by the average American, but especially the largest for African Americans, is home ownership,” Rep. Gregory W. Meeks, D-N.Y., said. “To hear that the banks are shrinking that is concerning to me. Then that opens up to where else can you get a mortgage on an equitable basis?”
Charles Scharf, CEO of Wells Fargo & Co., said banks have lost ground to other lenders outside the sector that face lighter regulations.
“The mortgage market has changed dramatically. If you were to turn the clock back probably 10 or 15 years, you find most of the banks up here as the largest mortgage lenders in the country,” Scharf said. “That’s not even close to true today.”
Rocket Mortgage, United Shore Financial Services and LoanDepot, all nonbanks, were the top three originators of mortgage loans in 2021, according to Bankrate LLC. Of the banks represented before the House panel, only Wells Fargo and JPMorgan Chase & Co. made the top 10 mortgage originators.
“It's not because we have purposely deemphasized the business. Regulations are inconsistent between banks and nonbanks, and cost structures are different. The nonbanks have taken an increasingly larger share of the market,” Scharf said.
Jamie Dimon, CEO of JPMorgan Chase, said the migration of mortgage lending outside the banking sector carries risk, especially during an economic downturn.
“It is riskier because the smaller companies cannot finance and advance funds to securitizations when there's a crisis. We could,” he said. “We do need to reform it for the sake of the industry so that people can get mortgages at all times.”
Executives, aided by questions from Republican members, used the appearance before the committee to push for lower capital requirements. The Federal Reserve’s top banking regulator, Michael Barr, in a speech this month said he would examine whether higher capital requirements are needed.
Ranking Republican Patrick T. McHenry, R-N.C., asked executives what would happen to their lending activities if capital requirements increased and banks were required to keep more liquid assets on their balance sheets.
“There's a cost to this and there's an economic cost, and it changes behavior at the institution, which means you don't lend as aggressively on the margins,” McHenry said.
Executives said higher capital requirements would raise the cost of lending and lower the capital available in the real economy.
“Liquidity requirements, international requirements, Basel requirements, etc., do restrict lending, raise the cost of lending, damage markets a little bit, reduce mortgage lending at some of our banks,” Dimon said. “Unfortunately, some of that's going to happen when things get worse. So JPMorgan will be sitting with a trillion dollars unable to be deployed to help our clients, to intermediate markets at precisely the wrong time.”
‘If they’re working, they’ll be fine’
The executives said consumers have so far weathered rising prices and are well-positioned heading into a possible recession, as the Fed raises interest rates to rein in inflation. However, how consumers fare would depend on the length and severity of a rescission, they said.
The Fed raised its funds rate by another 75 basis points Wednesday, its third straight increase of that size. Last month, the consumer price index measured an annual inflation rate of 8.3 percent, according to the Bureau of Labor Statistics.
Andy Cecere, CEO of U.S. Bancorp, said consumers are adjusting their spending habits to higher prices.
“While consumers' spending levels in total are about 10 percent above last year, the things that people are spending money on have changed substantially from discretionary to nondiscretionary items like food and gas,” he said.
Savings still outstrip pre-pandemic levels, but the rate at which consumers are saving has stabilized in the last three months compared to monthly growth for the previous year and half, he said.
Moynihan said consumers are in a strong position, but their continued well-being will depend on employment.
“If you look at where the consumer stands today, they have more money in their accounts, as my colleague said earlier. They have borrowing capacity left. The unemployment rate is very low. Their wages are rising,” Moynihan said, adding that inflation would cannibalize some of those gains.
“The question is what happens to them and that's always going to come down to, if they're working, they'll be fine,” he said. “The Fed knows that unemployment is probably going to rise. The question is, can they guide it to the right place and not have it go too far?”
Dimon said there’s a “small chance” the Fed achieves the soft landing it’s aiming for as it tries to tamp down rising prices.
“There's a chance of a mild recession, a chance of a harder recession,” he said. “And because of the war in Ukraine and the uncertainty that causes in global energy supply and food supply, there's a chance it could be worse. I think policymakers should be prepared for the worst, so we take the right actions if and when that happens.”
Rep. Bill Foster, D-Ill., rejected the executives’ complaints, saying capital requirements put in place following the 2008 financial crisis had done little to prevent the banks from “having an extraordinarily profitable decade.”
“I'm amazed at how consistent your industry is. When you come to us, it is almost always with some elaborate set of logic to try to convince us that you should be allowed to lever out more,” Foster said. Banks push for more leverage because they know the federal government will be a backstop when things go wrong, he said.
“The game that you will always be in is trying to allow you to lever up and, and expose the taxpayer to that risk. And our job will always be to push back against that and demand enough regulatory capital that it's very unlikely that a taxpayer will be called upon to do that,” Foster said.