There were many reasons the U.S. fell into a recession and capital crunch that went global within the past few years. One was lax regulation; another was a stampede of homes being bought by owners who couldn't afford them.
Another reason was that many U.S. investment banks and other financial firms didn't have enough money to survive if their investments went belly up. This is called capital requirements, and during the past decade the bank money behind junk mortgages and credit default swaps was way too low.
The result was that some banks failed, a major insurer, AIG, became the property of the U.S. government, and many other investment banks needed very high, taxpayer-funded bailouts.
Had capital requirements for banks wishing to invest been at a higher, more practical number, say 14 percent, many of these financial firms would not have been able to accumulate so many of these bad investment bets. We support a proposal by some elements of the Federal Reserve to increase capital requirement levels to as high as 14 percent.
The idea of using capital requirement reserves is implemented so a bank will have enough money to protect itself against investment losses. Obviously, the requirements were not high enough for the past few years. Not surprisingly, the major investment banks are fighting this effort to up the capital requirements. It's easy to see why: The more money banks have to bet on investments, the more money they can potentially earn. Nevertheless, the reverse holds true -- banks can also lose a lot more money, just like they within did the past few years. And it will be a disgrace if taxpayers have to bail out Wall Street again because investment banks can't cover their losses.
Unfortunately, the banks have a lot of money to pay very expensive lobbyists, and they definitely have the ear of national legislators. Already, Republicans on the House Financial Services Committee are saying that 14 percent is too high. There's a global proposal, called the Basel III, that would raise requirements to between 7 percent and 10 percent, but that, if passed, won't start for eight more years.
We know capital requirements for banks is dry stuff. But it's important because if Wall Street fouls up again, we'll end up paying for it. Let your legislators know that banks need higher capital requirements.
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