According to analyses of government data and interviews with more than 60 former and current federal officials, during our present administration there has been a sharp decline in financial penalties against banks and big companies accused of malfeasance. While many Republican officials have by and large welcomed the change, many others are concerned that taking a much softer approach toward banks could lead to reckless profits at any cost behaviors.
The jury is out. But the deregulation of the banking industry continues. Just this month the Federal Reserve announced one of the most significant rollbacks of bank rules since President Trump took office with a proposal for looser capital and liquidity requirements for large U.S. lenders.
Their latest proposal is a significant step in the march back from the tight controls imposed after the 2008 financial crisis. Congress earlier this year passed a bill which raised the level at which banks are considered “too big to fail” to $250 billion.
Addressing deregulation concerns, Federal Reserve Chairman Jerome Powell stated that “Congress and the American people rightly expect us to achieve an effective and efficient regulatory regime that keeps our financial system strong and protects our economy, while imposing no more burden than is necessary.”
The Fed does now has more discretion and their proposal supposedly takes advantage of greater oversight authority to review how complex a firm may be or how connected it is to the broader financial system as other factors in deciding how onerous or prescriptive a bank should be regulated.
The draft proposal divides financial firms into four new categories based on a variety of risk factors, including international activity, off-balance-sheet exposure and reliance on short-term wholesale funding.
Lael Brainard, a member of the Fed Board of Governors, voted against the proposal and argues the proposal goes well beyond what Congress intended and raises the risk that American taxpayers will be on the hook again. “I see little benefit to the institutions or the system from the proposed reduction in core resilience that could justify the increased risk to financial stability and the taxpayer,” he said.
His objections were echoed by Better Markets President and CEO Dennis Kelleher who said the Fed’s actions are “unjustified” and “unwise” so late in the business cycle following a $1.5 trillion tax cut and a massive government spending bill; “Deregulating some of the largest banks in the country will make the financial system less safe, less stable and less protected from another crash.”
In a prior article I quoted Matthew Yglesias who believes that, while one move is not a huge deal, several other regulatory provisions that are in place to safeguard against another financial debacle and TBTF taking over once again are also going by the wayside. He states that “Republicans are sowing the seeds of the next financial crisis.”
David Dayen, the author of Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud, also warns us that the present administration’s zeal for financial deregulation could lead to an economic crisis. Mr. Dayen backs up his premise with by the findings of a new International Monetary Fund working paper, published in January, which provides empirical support for the idea that increasing large-scale bank deregulation actually helps precipitate a financial crisis.
The paper, a brilliant synopsis and examination of boom-to-bust cycles by economist Jihad Dagher looks at ten financial crises going back 300 years. And Dagher draws some frightening parallels with current events, noting that in each of the ten financial cycles studied deregulation accelerated dramatically in the time leading up to the next financial crisis.
Dragher indicts governments in all of the countries cited for amplifying the costs of the resulting crises by significant deregulation which inevitably leads to the next financial crisis. He says we “too often look at financial institutions as the cause of crashes, and of course, they play a role. But the relationship between politics and financial system performance needs much more scrutiny… Preventing the next crisis involves more than just an understanding of how the existing regulations failed, but also why they failed.”
Yes, obviously I am concerned about the increased zeal for banking deregulation. The 2008 financial crisis was to a large degree caused by too much of a loosening of financial regulations (one example here), which led to a market free for all of anything goes. The price of that deregulation was too high. Are we heading down that same road again?
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
