In loosening stabilizing regulations on banks with up to $250 billion in assets, the legislation dismisses the lessons of past crises. We know that banks often make the same mistakes at the same time — that’s the story of not just the recent mortgage crisis, but the savings & loan crisis of the 1980s. And three or four troubled banks in the $200-billion range add up, together, to a Lehman Brothers-level failure.
To ease regulations on these banks because they are not, individually, as big as the banks that caused the 2007 crisis is to misunderstand the nature of the crisis itself.
“The next crisis might be that a bunch of boring commercial banks all make the same mistake in a highly correlated way,” says Mike Konczal, a financial reform expert at the Roosevelt Institute. “The argument that this doesn’t hurt [like] what went wrong in 2008 isn’t that good of an argument.”
Another change is even more puzzling. Dodd-Frank says that the Federal Reserve “may” tailor regulation for the biggest banks, if it sees the need to do so. The Senate legislation surgically changes that word to “shall.” What that means is that rather than being able to regulate all big banks the same way, the Federal Reserve will now need to create specific regulations for each major bank it regulates.
This change does two things: First, it gives bank regulators — who may be hoping to someday cash in at the firms they now oversee — more power to decide the fate of the banks under their purview. Second, it gives the banks’ teams of high-priced lawyers more power to tie the Federal Reserve up in court by arguing that the regulations are not sufficiently tailored to their situation.
As Gary Gensler, the former head of the Commodity Futures Trading Commission, dryly noted in a letter to the Senate banking committee, “laws and regulations generally are better when they are applied consistently.”
There’s also a strange loophole in the bill that would make it easier for foreign megabanks like Credit Suisse and Deutsche Bank to escape regulation by sheltering their U.S. holdings in vehicles that keep them under the $250 billion mark. This seems like an obvious mistake, but when Democratic Sen. Sherrod Brown offered an amendment to close the loophole, it lost on a party-line vote.
Then there’s the provision raising the limit, from 50 to 500, on the number of mortgages a bank can offer before reporting on who got the loans and at which terms — a change that will make it harder to track racial bias in lending.
And all of this is being done to solve … what problem, exactly? As Gensler notes in his letter:
Corporate and industrial loans, as well as overall loans in the banking sector, have grown significantly since precrisis levels, 35% and 31% respectively. The financial system is back to pre-crisis levels of activity, representing over 7% of gross domestic product, consistent with some other developed nations. Bank profits were at record levels in 2016 and, in the third quarter of 2017, banking industry’s average return on assets was at a 10-year high. … The new [tax reform] law represents a 35% tax cut for the industry, or a total of $249 billion over the next 10 years.
Is the banking industry really in such dire need of relief?