Presidential Candidates Say the Darndest Things About Banks

Banks Brag About SIFI Status

Sen. Marco Rubio, R-Fl., is rightly known as an excellent debater, but during the fourth debate on Nov. 10, Rubio erroneously declared that banks and other firms crave being declared as "too big to fail."

"We have actually created a category of systemically important institutions, and these banks go around bragging about it," he said. "You know what they say to people with a wink and a nod? We are so big, we are so important that if we get in trouble, the government has to bail us out. This is an outrage."

This claim is demonstrably false, however. Regional and mid-sized banks are pressing Congress to raise the threshold at which they are considered systemically important and the big banks are doing their level best to convince the public and policymakers that they are no longer "too big to fail."

Capital Requirements Have Fallen Since Dodd-Frank

During that same debate, Florida Gov. Jeb Bush claimed that the Dodd-Frank Act had lowered capital requirements on the big banks.

"What we ought to do is raise the capital requirements so banks aren't too big to fail. Dodd-Frank has actually done the opposite, totally the opposite, where banks now have higher concentration of risk in assets and the capital requirements aren't high enough," he said.

But Bush was flat-out wrong. As a result of Basel III, all banks face higher capital requirements – and big banks face even higher requirements. The Federal Reserve Board finalized a rule last year that charges the largest and most complex banks a capital surcharge between 1% to 2.5%.

Removing Glass-Steagall Caused the Financial Crisis

Sen. Bernie Sanders, D-Vt., has consistently argued that the repeal of the Glass-Steagall Act in 1999 (under President Bill Clinton) helped cause the financial crisis.

Yet that idea has been widely debunked. When questioned on it by Hillary Clinton, Sanders doubled-down on the assertion, however, saying:

"Secretary Clinton says that Glass-Steagall would not have prevented the financial crisis because shadow banks like AIG and Lehman Brothers, not big commercial banks, were the real culprits," Sanders said in a speech in early January. "Secretary Clinton is wrong. Shadow banks did gamble recklessly, but where did that money come from? It came from the federally insured bank deposits of big commercial banks something that would have been banned under the Glass-Steagall Act."

Yet even that claim is erroneous. As explained by the Washington Post here, the bulk purchases of mortgage-related assets would have been allowed pre-1999.

"We can find little support for Sanders's statement that Glass-Steagall banned commercial banks from making loans to investment banking firms to facilitate their trading in the shadow-banking arena," the Post wrote in its Fact Checker blog.

Republican Regulators Literally Took a Chainsaw to Banking Rules

Former Secretary of State Hillary Clinton conjured up a dramatic image for her speech in October announcing her plan to rein in Wall Street: "In the years before the crash, as financial firms piled risk upon risk, regulators in Washington either could not or would not keep up. Top regulators under President George W. Bush posed for a picture literally taking a chainsaw to banking rules."

Clinton is correct that this happened. But the implication that this had anything to do with the financial crisis is completely disingenuous. The photo was part of an initiative by regulators to ease the burden on community banks by looking for outdated rules. The effort is required every decade by law and is underway again. It ultimately resulted in extremely minor changes, none of which paved the way for the housing collapse.

The Fed's Monetary Policy Caused the Crisis

During the GOP primary debate on Nov. 10, Sen. Ted Cruz, R-Tex., claimed the Federal Reserve Board's monetary policy actions during the 2000s directly caused the crisis.

"What the Fed is doing now is it is a series of philosopher-kings trying to guess what's happening with the economy," he said. "You look at the Fed, one of the reasons we had the financial crash is throughout the 2000s, we had loose money, we had an asset bubble, it drove up the price of real estate, drove up the price of commodities, and then in the third quarter of 2008, the Fed tightened the money and crashed those asset prices, which caused a cascading collapse."

Yet that's not the reason most experts give for the financial collapse of 2008. The Financial Crisis Inquiry Commission released a report in 2011 that found several causes, including breakdowns in corporate governance, firms willfully taking on too much risk, a mix of "excessive borrowing and risk by households and Wall Street," and policymakers that did not act fast or strong enough.

The commission also blamed the Fed but not for its monetary policy actions. The government commission noted that the central bank had the power to rein in the spread of toxic mortgages, but chose not to act.

Community Banks Are Being Devastated by Dodd-Frank

Marco Rubio stunned some viewers at the first Republican debate when he declared that more than 40% of small and midsize banks have been wiped out since the Dodd-Frank Act was passed.

The problem is that Rubio significantly overstated the decline in small banks since 2010. For the entire U.S., the total number of banks has fallen 18% since June 30, 2010, just ahead of the financial reform law's signing in July of that year.

If Rubio had limited his comments to his home state of Florida, however, his figure is more accurate. Since June 30, 2010, the number of banks in the Sunshine State has contracted by more than 35%.