Breakingviews: Bank CEOs channel movie mobsters in Basel fight

There is a spirited argument to be had about whether upcoming rules governing bank capital are fair or necessary. Yet the eight Wall Street chief executives who faced a U.S. Senate banking panel on Wednesday instead chose an ultimatum reminiscent of mobsters in 1920s movies: “Nice economy – it would be a shame if anything were to happen to it.” It’s an unhelpful way to get what they want.

The bosses of JPMorgan, Goldman Sachs, Morgan Stanley, Bank of America and peers are united in their dislike of the global rules known as Basel 3. They argue that forcing big banks to hold more capital will inflict higher prices on ordinary Americans. Mortgages will get harder for poor people to obtain, warned JPMorgan boss Jamie Dimon. Food prices will rise, lamented Goldman Sachs chief David Solomon. Farmers may lose their access to hedging, mourned Citigroup head Jane Fraser.

Banks have legitimate reasons to gripe. If the Basel 3 proposals go ahead, lenders will need around 20% more equity, based on the same business activities. It’s not clear if this is necessary to make big banks safer. And the rules have weird wrinkles. For example, derivatives trades with counterparties not listed on public markets – say, pension funds – are automatically treated as highly risky and require the bank to put up more capital.

Yet by insisting extra capital equals higher prices, banks are being dishonest about how finance works. Lenders can pass on costs to customers, but they can also accept a lower return, or find other ways to lower expenses. The biggest banks are amply profitable, with an average return on equity of 13% in the third quarter, according to Federal Deposit Insurance Corp data. JPMorgan’s consumer bank makes a 40% return. That sits uneasily with the idea borrowing costs will inevitably increase.

They’re on more solid ground when appealing to patriotic fervor. Several CEOs complained on Wednesday that U.S. global standing would be hurt by onerous rules. The flip side, though, is that big investors reward titanium-plated regulation. Banks similarly resisted higher capital requirements after the 2008 financial crisis. And it’s barely nine months since SVB Financial and a string of mid-sized U.S. lenders failed, in part because they successfully watered down some rules governing their larger rivals.

Dimon, Fraser, Solomon and their peers could acknowledge the benefits of regulation, while highlighting Basel 3’s inefficiencies and inconsistencies. By channeling prohibition-era mobsters, they risk losing credibility – even if they win the broader fight.