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May 2, 2017

The False Choice at the Heart of the CHOICE Act: Financial Protection Rules or Strong Banks and a Healthy Economy

Supporters of the Financial CHOICE Act claim the sensible financial protection rules enacted under Dodd-Frank are incompatible with economic growth and healthy banks. In fact, America’s financial system today is healthier, more capitalized, less leveraged, and lending more with less risk, than it was before the 2008 financial crisis. Seven years after the passage of Dodd-Frank, the data give real time, real life evidence that financial protection rules have helped the economy – and banks of all sizes – to thrive.

Lending at record highs

  • American Banker reviewed the evidence and concluded:

Republicans have repeatedly asserted that the 2010 financial reform law has increased the cost of consumer lending and cut off access to credit….Yet the available data indicates otherwise. Consumer credit has roared back in the six years since Dodd-Frank, with a 46% jump in outstanding consumer credit to $3.8 trillion….The fact remains that mortgage, auto and credit card lending have all gone up since 2010….[Mortgage] lending standards are as loose as they’ve been since the downturn….Auto lending has been on a tear since the financial crisis….Credit card lending has returned to pre-crisis levels with total lending hitting an all-time high of $996 billion.”[1] 

  • Bloomberg reached a similar conclusion:

Lending declined initially after 2008, when the entire banking industry was almost wiped out by the collapse of the U.S. housing market. But it’s grown steadily since then, expanding by 6 percent a year since 2013, far faster than the economy. Banks now have a record $9.1 trillion of loans outstanding.[2]

Record profits for banks large and small

  • FDIC data show record profits in 2016 for the financial sector, with industry loan balances up more than 5% last year and loan balances for community banks up an astonishing 8%.[3]  
  • Federal Reserve Board Chair Janet Yellen recently testified, “U.S. banks are generally considered quite strong, relative to their [international] counterparts. They built up capital quickly….They’re gaining market share and they remain quite profitable.”[4]
  • Former Federal Reserve Board Chair Paul Volcker said, in April 2017:

[C]laims that Dodd-Frank and other regulatory approaches have somehow gravely damaged the effective functioning of American financial markets, the commercial banking system, and prospects for economic growth simply do not comport with the mass of the evidence before us. Here we are in 2017 with a near fully employed economy, close to stable prices, bank profits at a new record, and the return on banking assets again exceeding one percent. Loans at both large and small banks are at new highs, double the pre-crisis years.[5]

U.S. banks thrive while Europe struggles

The post-crisis reforms are doing exactly what they were meant to do: maintain stability in the financial system. We know this because, while U.S. banks are flourishing, European banks are not.  According to the European Banking Authority, EU banks face low profitability, and are weighed down with significant numbers of non-performing loans.[6]

What accounts for the difference? Simply this: in the aftermath of the crisis, the U.S. acted swiftly to stabilize the financial system. National Economic Council Chairman Gary Cohn, spoke to Bloomberg TV about this in 2016 when he was serving as President of Goldman Sachs:

Almost all US banks took our medicine [recapitalizing, restructuring and implementing financial reform rules] early. We went out and raised capital really early in the process and then we went out and raised capital a second time….We’re subject to enormously robust stress tests here in the United States, and I give the Fed enormous credit for what they’ve done in stress testing the major banks here in the United States….I think some of the European banks have been slow to getting themselves recapitalized and getting their financial balance sheet in the best place it can be.[7]

Strong growth requires strong rules

Contrary to the claims of supporters of the Financial CHOICE Act, it is not the case that financial protection rules and economic growth are mutually exclusive.  In fact, durable, sustainable economic growth requires effective rules that ensure a balanced, competitive financial sector works in support of the economically productive real economy.

Economic growth and jobs simply will not come from the finance-driven boom-and-bust cycles that have plagued the country since the 1990s. The only way to get financial firms – including, but not limited to, banks – back into the business of financial activities that support the real economy is to limit their ability to conduct high-risk trading activities and complex transactions that enrich Wall Street, but do nothing to promote real jobs and growth on Main Street. 



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