Dear Congress: Reg relief bill is a giveaway for large banks
The Senate is expected to take up banking legislation this week that would weaken oversight on some of the largest banks in the country put in place after the financial crisis.
While the work that Banking Committee Chairman Sen. Mike Crapo, R-Idaho, has done to bring some Democratic senators on board is admirable — and is a far cry from the House Financial Choice Act — passing this bill would still be a significant mistake.
To start with, the bill would weaken oversight of all firms, including the largest 13 firms, by undermining a key capital ratio through the exclusion of certain assets from consideration, and by handing large banks a litigation tool against stricter standards — a sort of creeping deregulation.
The legislation goes on to automatically eliminate annual stress testing — analyzing how economic shocks would weaken the financial system — and tougher oversight of 25 of the 38 largest bank holding companies in the United States. It would also give regulators discretion to go even further to weaken oversight.
That is both unnecessary and unwise.
It is unnecessary to provide for the kind of tailored regulation that makes sense, because the Federal Reserve already has the authority to provide for a graduated system of regulation, with increasing stringency, depending on the risk that the firm poses to the financial stability of the United States.
Graduated standards are already at work. Fed stress testing applies to the largest firms in the country, the 38 firms with assets of $50 billion and above. The largest, most complex financial institutions face the most stringent standards. The Fed, for example, imposes a supplementary leverage ratio, a countercyclical capital buffer and detailed liquidity coverage rules only on 13 firms with over $250 billion in assets. The very largest U.S. banks on a global basis, currently eight bank holding companies, are subject to even tougher standards, including capital surcharges, more stringent leverage ratios and long-term debt requirements.
None of these enhanced measures apply at all to about 95 percent of banks, the category commonly described as community banks, those under $10 billion in assets — some 6,000 banks in communities all across the country.
The measure is unwise because stress testing and heightened prudential standards make sense for the range of very large bank holding companies in our economy, not just the top 13 firms. The 25 banks over $50 billion in size that would be exempted under the bill hold over $4 trillion in assets and represent a wide variety of risk profiles, business strategies, sizes and specializations, and include both foreign and domestic firms. It is hard to argue that credit card companies, the U.S. operations of massive foreign banks, specialized trust companies and large broker-dealers, for example, are simple firms not requiring annual stress testing — but that is what this bill would do.
"It's bad enough that the administration is rolling back enforcement at the Consumer Financial Protection Bureau. Congress does not need to join in the parade."
Unlike fixed capital ratios, stress testing seeks to understand how macro shocks would deplete capital. Moreover, the stress tests are not as easy for financial institutions to game as fixed capital rules. It would be a serious mistake to exclude large bank holding companies from stress testing.
Some have mistakenly said that the Dodd-Frank Act describes firms with $50 billion or more in assets as systemic. But that is simply not the case. Congress set the $50 billion threshold, and another threshold for other measures at $10 billion, to provide a floor under which smaller firms would know that they are not subject to the new sets of rules.
The rules were not meant to only apply to the largest handful of systemically important firms. They are designed to work in a graduated, tailored way to increase the resiliency of the financial system as a whole. Risks aggregate across the financial system, including from institutions of a variety of sizes and types. It is the very antithesis of macro-prudential supervision to focus only on the largest handful of financial firms and to ignore risks elsewhere in the system. The public interest is in the health of the financial system as a whole. Moreover, smaller banks themselves face risk from larger institutions and from activities across the system as a whole.
Understanding those risks is essential if we are to have a safer financial system than the one we had before the financial crisis. We must not intentionally blind regulators to these risks in advance.
There are a number of other measures in the bill that would weaken consumer protections — including making it harder to detect discrimination in mortgage lending for large numbers of banks, weakening escrow protections in ways that will undoubtedly get many homeowners into financial trouble, loosening the ability-to-repay rules that were enacted after the financial crisis and undermining protections for mobile home buyers, among our most vulnerable families.
It's bad enough that the administration is rolling back enforcement at the Consumer Financial Protection Bureau. Congress does not need to join in the parade.
It's not too late to modify the bill, stripping out the provisions that only benefit large banks and focusing on meaningful community bank relief with real consumer protections.