U.S. banking regulators have issued another round of dangerous de-regulatory proposals that will increase the likelihood of another financial crisis. These rule proposals would scale back three of the most important banking reforms established in the Dodd-Frank Act:
- Capital requirements designed to fortify banks against periods of financial stress and instability.
- Stress testing requirements designed to ensure that banks really are capable of weathering serious downturns.
- Resolution planning requirements that enable distressed banks to be wound down without causing massive disruptions in the financial system.
We submitted substantive comment letters to the agencies detailing our opposition to those unwise and dangerous proposals, which are summarized and hyperlinked here:
Better Markets Comment Letter to the Federal Reserve on Enhanced Prudential Standards for FBOs
- In this proposal, the Federal Reserve seeks to reduce the frequency of stress tests for large foreign banks, known as “FBOs.” For example, large FBOs with between $100 billion and $250 billion in assets would no longer be required to conduct their own stress tests and would be stress-tested by regulators only every other year. As we explain in our comment letter, this proposal is a step in the wrong direction, as stress tests are one of the key reforms established in the Dodd-Frank Act to ensure that banks can survive periods of financial instability without requiring a taxpayer bailout. And history proves that strong regulation and oversight is just as important for foreign banks as it is for U.S. banks. As we also explain in our comment letter, foreign banks received huge amounts of support from the Federal Reserve during the crisis.
Better Markets Comment Letter to the banking regulators (FRS, FDIC, OCC) on Regulatory Capital and Liquidity of Foreign Banking Organizations
- In the other proposal related to foreign banks, the Federal Reserve, the OCC, and the FDIC seek to scale back capital and liquidity requirements. For example, under the proposal, two important capital requirements—the countercyclical capital buffer and the supplementary leverage ratio—would no longer apply to large FBOs with between $100 billion and $250 billion in assets. Here too, and as explained in our comment letter, the regulators are following a dangerous path, as capital requirements are essential for ensuring that banks have enough money on hand to weather stressful economic conditions, prevent financial crises, and avoid taxpayer bailouts.
Better Markets Comment Letter to the Federal Reserve and FDIC on Resolution Plans Required (Living Wills)
- Finally, under a third recent proposal, the Federal Reserve and the FDIC would substantially reduce the frequency with which banks must prepare resolution plans, or “living wills.” For example, as explained in our comment letter, under the proposal, even the largest and most complex banking organizations (known as “GSIBs”) would only be required to file a full resolution plan once every four years. Smaller but still massive banks would only be required to file a full resolution plan once every six years, with more limited plans in between. And banks in the $100 billion to $250 billion category would not be subject to any resolution planning requirements at all.
These proposals all have major flaws in common. They will weaken our financial system without any legal or policy justification. Banks are thriving, lending is up, and there is simply no need for any relief from the costs of regulation. Moreover, the post-2008 crisis reforms are working well. Unwinding them now is unnecessary and foolhardy.