Higher Capital Requirements Won't Impact Lending?

David Enrich's article in the WSJ yesterday suggested that significantly higher capital levels at U.S. banks wouldn't impact business lending. He cited a study by Douglas Elliott of the Brookings Institution, the liberal think tank, to support his thesis.

Financial industry analyst Tom Brown scoffs at this notion.

If you go through Elliott’s study in detail, you’ll see that that hypothetical 20-bp rate rise is accompanied by some highly iffy assumptions. Among other things, “administrative costs” are supposed to fall by 10 basis points (good luck with that), while “other benefits,” whatever those are, are supposed to improve by 10 bp. And the bank’s debt costs are supposed to fall by 20 basis points, even though (as Elliott himself notes) bank liabilities are mainly deposits that are guaranteed by the federal government and therefore are already as cheap as they’re likely to get. All of which is a long way of saying that Elliott seems to have made some unrealistic tweaks to his assumptions to arrive at his conclusion that boosting capital levels would raise borrowing costs by 20 basis points.

And of course, apart from credit becoming tighter and more expensive, foreign banks would very likely take huge market share in the U.S. because even socialist Europe knows that if they have lower capital levels than the U.S., it is good for their banks.