FDIC's Sheila Bair Needs to Learn Arithmetic

by: Tom Brown

Is it July yet? That’s when Sheila Bair is scheduled to step down as head of the FDIC and, based on her idiotic comments yesterday to The Wall Street Journal, the moment can’t come fast enough.

Bair seems to persist in believing a mathematical impossibility: that the higher capital requirements she says are in order for the SiFis wouldn’t crimp their lending. Which is, in a word, nuts. The arithmetic’s not hard. At a 7% capital ratio (which is what the Basel agreement would require), a bank with $10 billion in capital could support roughly $140 billion in assets (that is, lending). At the 10% ratio Bair has in mind, that same bank could support just $100 billion in assets, or 40% less.

As I say, this isn’t hard. A 40% constriction in lending capacity by the big banks would constitute a huge decline, and would almost surely have a material effect on the rate of overall credit creation and economic growth. What’s more, the lucky borrowers who would be able to get loans would be forced to pay a higher interest rate for them. This week, U.S. Bancorp. CFO Andy Cecere told an investor conference that if the bank has to raise its Tier 1 Common Capital Ratio to 10% from 8.5%, it would have to increase the interest rate it charges on loans by 25 basis points.

Bair has been a disaster as a regulator. As my pal Dick Bove recently pointed out, she was asleep at the switch during the early part of her term, in 2006, when the excesses in the housing market were still building and when her agency could have done something to prevent the subsequent disaster. Then after the crackup, her agency overreacted (via its bizarre devotion to forced loan mods, for instance) and delayed the market-clearing process needed to get the housing market back to normal. Now she seems to want to impose a regulatory regime that would have the effect of institutionalizing subpar economic growth. A disaster.

As I say, July can’t come fast enough.