AUSTIN—Today, the Texas Public Policy Foundation and Boyden Gray PLLC released a new white paper explaining how the Federal Reserve, FDIC, and OCC’s expansive new Capital Adequacy Rule may be unconstitutional under a strengthened constitutional nondelegation doctrine.
This summer, federal banking regulators proposed the Rule, which would significantly expand the amount of capital that large banks and other financial institutions are required to hold, increasing federal regulators’ control over bank lending and choking off access to credit for private borrowers.
Specifically, as TPPF and Boyden Gray PLLC describe, the Rule “would extend capital standards that currently apply only to the very largest, global banking firms to all banking firms with assets greater than $100 billion, a more than fivefold increase in the number of regulated entities.” The Rule would also “mandate a more stringent ‘standardized’ approach to risk modeling that would require significantly higher capital levels.” These changes “portend massive effects on banks and the economy—likely requiring 16% more capital on average” and would be “so impactful that experts estimate it will reduce the annual GDP of the United States by $67 billion each year.”
TPPF and Boyden Gray PLLC argue that the Rule and the statutes that purportedly authorize it rest on a shaky legal basis. “These federal banking agencies claim authority to issue the Capital Adequacy Rule … under various statutes broadly empowering them to require banks to maintain ‘adequate capital,’” they explain. “This claimed authority raises serious questions about whether such a broad delegation of power from Congress is consistent with the U.S. Constitution.”
TPPF and Boyden Gray PLLC explain that the Constitution “requires Congress—not agencies—to make policy decisions, and limits agencies to finding facts and filling in less important details.” But as the Rule demonstrates, such ill-defined statutory authority expands the power of unaccountable bureaucrats to make massive policy judgements—that re-shape the Nation’s economy—instead of our elected representatives.
Under the Rule’s authorizing statutes, TPPF and Boyden Gray PLLC argue, “the agencies, not Congress, have been left to make key judgment calls about ‘the maximum level of depository system risk that society is willing to tolerate.’” Moreover, “[b]ecause Congress omitted meaningful definitions in this realm, evolving concepts of ‘risk’ could lead regulators in the future to incorporate social, political, reputational, or other considerations.”
The nondelegation problem is especially acute here, TPPF and Boyden Gray PLLC explain, “because of the distinctive ‘multi-layer’ delegations. … The relevant agencies are not only empowered to set whatever capital levels they deem to be ‘adequate,’ but Congress has also expressly authorized them to consider any factors they deem relevant when doing so. Congress has thereby multiplied the agencies’ discretion by empowering them not only to determine what capital is ‘adequate,’ but also to decide what considerations go into that determination in the first place.”
Although the Capital Adequacy Rule is likely constitutional under the current nondelegation doctrine, TPPF and Boyden Gray PLLC write, “a majority of the Justices on the Supreme Court have indicated a desire to revisit that doctrine and strengthen it consistent with its original understanding. Doing so would likely rein in sprawling delegations that leave important policymaking in the hands of administrative agencies. Under the doctrine as originally understood and correctly applied—and as envisioned by those Justices—there are strong arguments that the Capital Adequacy Rule is not constitutional.”