Capital Requirements' Safe and Sound Delegation

Abstract

The nation’s federal banking agencies are engaged in the highest profile rulemaking in the history of bank regulation. The banking industry has blanketed Washington, D.C. with ads decrying the proposal’s “real costs for everyday Americans” and claiming that the proposal, if finalized, will “make it harder for lower- and middle-income families to buy a car or their first home, for small businesses to secure essential funding to hire more workers, and for farmers to take out loans for next year's crops.” Yet regulators describe the rule, known as “Basel III Endgame” or simply “Endgame,” as simply making minor tweaks to regulatory capital requirements to better “enable banks to support the economy.”

Yet what has started as a dispute about optimal regulation has turned into something much more pernicious. In criticizing the Endgame proposal, opponents have gone beyond simply criticizing regulators’ policies and the process by which the rule was proposed to threatening lawsuits that would, if successful, upend a decades-old regulatory regime. The opponents of Endgame argue that it violates the nondelegation doctrine because it “shifts to the agencies the authority to make the fundamental ‘policy judgment’” in a way that “is at odds with the text and structure of the Constitution.” But on this score, Endgame is indistinguishable from most capital regulations. If courts find that the underlying statutory authorities violate the nondelegation doctrine, that holding will undermine FBA’s authority to issue any capital rules at all.

Fortunately, this is not the case; the statutes permitting the FBAs to enact capital requirements for the institutions they regulate satisfy both the intelligible principle standard and more stringent rearticulations of the nondelegation doctrine. This article puts this threat to rest by examining the evolution of the banking laws and identifying the source of regulators’ authority in statutes that allow regulators to prohibit “unsafe or unsound” practices, which is more than adequate delegation to satisfy any constitutional concerns.

Keywords: bank capital, nondelegation, Endgame