Kai Ryssdal: Once upon a time, there was a financial crisis. In the land of the world's biggest economy, big banks got into some big trouble. Government stepped in, bailouts were delivered, and the story ended -- if not happily ever after -- then at least without the predicted economic apocalypse.
Then Congress had an idea, and called it the Dodd-Frank bill. They said, let's make those big banks keep more cash in-house to protect against further losses. Today, regulators approved a rule do to just that. And the banks protested, saying now they'll have less money to lend to the economy.
Our New York bureau chief Heidi Moore delivers the moral of the story.
Heidi Moore: Anat Admati is on a quest to get big banks to admit the truth. The Stanford professor says banks have no excuse not to lend. She is especially adamant that they should keep big cash cushions to protect themselves against another financial crisis.
It's a simple concept: It's just like keeping more money in your checking account so you won't go bankrupt when you pay your credit card bill.
Yet it's been an uphill battle for Admati to make her point.
Anat Admati: I couldn't be heard. There was nobody who wanted to hear it for months and months.
Admati is being heard now. FDIC chairman Sheila Bair appointed her to a group of experts who will advise on how to prevent bank failures from bringing the financial system to its knees.
Admati says big banks have become the subprime borrowers of the financial system: they use a tiny little bit of equity to take on a lot of debt. Some of their limits are pretty generous.
Admati: That's like buying $1 million house with $30,000. It's amazing! It boggles the mind.
Banks don't like to hold cash because they have to pay taxes on it.
Erik Oja, an analyst with Standard & Poor's, disputes the banks' claims that cash cushions reduce the money available to lend to business. He says a big reason that lending isn't growing is that banks have overreacted to the financial crisis. They're afraid the loans will default.
Erik Oja: You hear a lot of anecdotal evidence that small business owners looking to expand are not able to get bank loans despite having a long and good credit history. So that points to banks probably being overly cautious.
Small and midsize banks have high capital requirements already. And according to Sheila Bair, they're doing a better job of lending than the big banks are. So leveling the playing field shouldn't be a bad thing.
Admati says the banks are being too flip about the risks they're taking without bigger capital cushions. If they can't absorb their losses, we'll have to.
Admati: When something goes wrong, taxpayers have to bear that cost.
Jamie Dimon, the CEO of JPMorgan Chase, has been outspoken against higher capital requirements. Admati wrote a letter today to the bank's board of directors saying his reasoning was flawed.
In New York, I'm Heidi Moore for Marketplace.