No Need for Title VI with Simpler, Higher Capital

Title VI—Improvements to Regulations of Bank and Savings Association Holding Companies and Depository Institutions— has as a stated objective to improve the regulation of depository institutions. Sections 606 and 607 of Title VI call for bank holding companies (BHCs) to be “well capitalized,” rather than “adequately capitalized.” If Dodd–Frank stopped here, perhaps we would have had the foundation for what might have served as a sound framework for the regulation of depository institutions.

However, like much of Dodd–Frank, Title VI reflects a reversal of what Fischer Black, Merton Miller, and Richard Posner described when they noted that a “striking and heartening development in banking regulation in the last decade has been a movement away from exclusive preoccupation with bank-asset safety and toward greater awareness of the benefits of competition.” They were speaking of the increase in national bank charters, the increasing number of activities banks were allowed to engage in by comptrollers of the currency, and tolerance for BHCs as a way of circumventing onerous state branch-banking laws. Title VI attempts to fix perceived, perhaps even misdiagnosed, problems during the most recent crisis, rather than addressing the source of the historically fragile design of U.S. banks, which explains the large number of banking crises throughout U.S. history.

Continue reading