One of the more gripping plot lines in Erich Remarque's seminal work, "All Quiet on the Western Front," is how the excitement and enthusiasm the characters feel in the beginning of the conflict degrades into misery and improvisation. "In any case, the bayonet isn't as important as it used to be," he writes. "It's more usual now to go into the attack with hand grenades and your entrenching tool."
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World War I is a poignant example of many of humanity's worst instincts converging all at once, but the bad instinct that I wanted to highlight here is the hubris of believing that if you plan carefully enough everything will be fine. Millions of horses were enlisted in the beginning of a war that ushered in the demise of cavalry charges rather quickly. By the end, they were replaced by tanks — a contraption unimagined before the war. In other words, necessity and circumstances are more likely to yield useful tools than tabletop exercises and timetables.
When Toronto-based TD Bank was found guilty of a range of brazen money-laundering violations involving drug and human trafficking cartels, the evidence prosecutors presented included almost comical vignettes of drug dealers showing up to the teller window with duffle bags full of cash and employee text messages to the effect of "LOL this is so illegal." Naturally, regulators and prosecutors would want to throw the book at a bank like that.
So when they did, it was interesting to me that they chose to apply an asset cap on TD's U.S.-based affiliates — that being the extent of the Office of the Comptroller of the Currency's jurisdiction. What is more, the asset cap will ratchet down by 7% annually until the affiliates are in compliance — an attention-grabbing new twist on the original recipe.
Asset caps are a new thing, having only been used once before in 2018 in the wake of Wells Fargo's myriad scandals, so the playbook for how regulators apply them and how a bank gets out of them is still being written. (Wells Fargo is still laboring under its cap.) But an asset cap is an effective way to get the urgent attention of a bank's management and board of directors and compel the wheels of change to begin turning, and in that it certainly has been effective.
Contrast that enforcement tool with the various other tools that lawmakers thought regulators would need and use after the 2008 financial crisis that remain on the books, but largely on the shelf.
Stress testing — and the once-mortal threat of having dividends restricted — served as a meaningful incentive for banks to get their capital ratios in order for several years, but the process has evolved and consolidated in recent years into either an arbitrary hassle or a meaningless gesture, depending on who you ask. The living wills that regulators painstakingly integrated into the bank regulatory regimen did little to smooth the resolution of Silicon Valley Bank, Signature and First Republic last year because the asset thresholds changed. The Financial Stability Oversight Council was created to apply bank regulatory requirements on nonbanks with systemic importance, but to date no nonbank has ever actually had those requirements imposed. The Countercyclical Capital Buffer has never been raised and it doesn't really seem like it ever will.
I realize this is a little like comparing apples to asteroids. The post-crisis tools I just described are prudential and supervisory, and in the case of stress testing and living wills went a very long way in helping banks and the financial system get itself on surer footing. But while banks can know when stress tests are going to happen or what living wills should look like, with an asset cap there are very real questions about how, when and why a regulator might stunt the growth of a major bank. As David Zaring, a law professor at the University of Pennsylvania's Wharton School of Business, put it, "In some ways, we have to take on faith that the government knows what it's doing here."
It also begs the question of why this money-laundering problem wasn't detected and squashed by regulators when it was only a little baby problem and not a gigantic, multinational billion-dollar problem — a conversation that regulators had already been having and is now made all the more urgent.
John Heltman is the Washington Bureau Chief for American Banker, leading coverage of federal bank regulators, monetary policy and Capitol Hill. John,... Read full bio
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