It’s not just banks with a stake in achieving regulatory relief
Editor’s Note: This blog post originally appeared in slightly different form on Medium.com.
As Washington focuses on former FBI Director James Comey’s testimony this week, something else will be happening in the nation’s capital that will have a far greater impact on the U.S. economy. Congress and the administration will both take initial steps to fix regulatory rules that are hurting banks’ ability to serve their customers and communities, and are holding back economic growth.
The first move this week will come from the administration. As soon as this week, the Treasury Department is to release a much-anticipated report on potential reforms to bank regulation that could free up more resources for lending, reduce artificial barriers between banks and their customers, and give Americans more choices about their financial future.
The report comes in response to President Trump’s executive order on “core principles for regulating the U.S. financial system.” While we don’t know what’s in the final report, ideally it will articulate several areas where reform is much-needed, such as capital requirements, liquidity and mortgage regulations.
These are not esoteric topics. Consider a few examples:
- Unnecessarily complex mortgage rules have driven many community banks out of the mortgage market. One small bank in Iowa — a single example of many — stopped making home loans because the software it would have had to purchase to meet new Dodd-Frank Act paperwork requirements would have overwhelmed what it earns in making those mortgages. These rules also place emphasis on one-size-fits-all product features that make it difficult for bankers to provide customized home loans.
- Customers are clamoring for small-dollar, affordable personal loans to handle emergencies or cover transitions between work, and bankers have long responded, with most banks offering small personal loans, in many cases as a special convenience to customers. But regulators have discouraged banks from providing some popular products and have pending proposals that would exclude more than half of community banks’ small-dollar loan programs and make them economically impossible — ironically, pushing customers toward riskier, under-the-table sources of funding.
- A wave of global rules implemented after the financial crisis sought to address the problems that led to a cash crunch during the crisis. Worryingly, those rules — developed at a global level for global banks — actually make the U.S. financial system less resilient. For example, by narrowly defining what counts as the high-quality liquid assets banks are required to hold, the rules strongly encourage banks to hold onto limited assets in a crisis instead of lending while making it harder for banks to accept deposits — thus potentially making the crisis even worse.
By recommending these and other areas for reform, Treasury can go a long way toward promoting growth and choice. And while Treasury is not a regulatory agency and cannot change any regulations on its own, I expect that its report will serve as a blueprint for the new regulatory officials President Trump will nominate in the future.
Meanwhile, on the other end of Pennsylvania Avenue, Congress is moving forward on its own reform package. The House this week will begin debating House Financial Services Committee Chairman Jeb Hensarling’s Financial Choice Act. The bill, which cleared the committee last month, includes many sensible, targeted fixes for financial rules that are doing more harm than good, as well as other changes that require some further study and analysis.
Among the provisions that we support are: Allowing regulators to tailor their oversight to the unique risk profiles of individual financial institutions; providing greater opportunities for banks to appeal out-of-bounds decisions by their examiners; and making it easier for banks to design mortgages for the individual conditions of creditworthy borrowers (provided that the bank is willing to face the risk of holding the loan in its own portfolio).
The legislation is a good first step towards regulatory relief, and we urge the Senate, which will hold its own hearing on bank regulation this week, to follow quickly with its own legislation.
There is a great opportunity this year to show the world that Congress can still pass bipartisan, common-sense legislation that helps lift the U.S. economy.
It’s important to note that we are not seeking to roll back all of the financial rules put in place after the crisis. Changes were needed, and lawmakers, regulators and bankers themselves took important steps to improve safety and soundness. But as with any major piece of legislation, some of the provisions in Dodd-Frank went too far, especially for community banks, and need to be reassessed. Fixing the regulatory rulebook as I’ve described here would allow banks to free up compliance costs and put that money toward lending, which in turn would drive growth and job creation — and not a moment too soon. According to the latest figures from the Federal Deposit Insurance Corp., loan growth declined in the first quarter for the first time since 2013. Meanwhile, noninterest expenses — which include the added burden of complying with the tens of thousands of pages of new regulations since Dodd-Frank — rose by 4.3% year over year.
Finally, consider a macro reason we need regulatory reform for banks: Since Dodd-Frank became law, nearly 2,000 banks have either closed or been acquired. Most of these are small community banks, neighborhood lenders who know their customers and who provide customized financial services.
Meanwhile, just five new banks have opened in the U.S. since the passage of Dodd-Frank. The regulatory costs are just too high. Every bank that shuts its doors or sells without a new one started means less competition, less opportunity and less growth for communities across the country. Is it any wonder the economic recovery has been one of the most sluggish in American history?
This busy week in D.C. will be a significant start on the regulatory reforms we need to accelerate this economy, grow jobs and create opportunity.
If you’re concerned about job creation, local economic growth and access to affordable credit, you might want to pay attention to this other Washington story this week. Everyone in America has a stake in it, not just the nation’s banks.