Washington, D.C.  –  Dennis M. Kelleher, President and Chief Executive Officer of Better Markets, released the following statement regarding the rulemakings today by the Federal Deposit Insurance Corporation (FDIC), which will also be adopted by the OCC and Federal Reserve:

“It is no coincidence that, just two weeks before a Presidential election, Trump’s banking deregulators are rushing to finalize rulemakings favoring Wall Street’s biggest banks on partisan votes. Joining the CFTC last week, the SEC the week before and the OCC before that, this is just the latest slap in the face to Main Street families, businesses and taxpayers, who will pay the price for an unstable financial system that is more prone to failure, contagion, crashes and bailouts. That’s what happened in 2008 and these rules were supposed to make that materially less likely—by that standard the banking regulators at the FDIC, OCC and the Fed have failed again.

“One of the key causes of financial crashes and contagion is a lack of readily available cash to meet customer, creditor, counterparty and other demands, which always spike in a crisis. This mismatch between banks’ assets and liabilities — as well as banks’ use of short term funding — forces banks into “fire sales” of assets, which cause asset prices to plummet, which lead to asset price markdowns, which ignite contagion and a vicious centripetal force pulling the entire banking and then financial system down. That’s why banks having enough liquidity is key to preventing crashes and contagion. It’s like taking away the matches from an arsonist: it prevents the fire from starting or spreading so you don’t have to stop it later from getting out of control, in this case with taxpayer bailouts.

“That’s what the Net Stable Funding Ratio (NSFR) and its companion rule, the Liquidity Coverage Ratio (LCR), are supposed to do: require the most dangerous, too-big-to-fail Wall Street banks to have enough very liquid, high quality assets to fund themselves for 30 days (the LCR) and enough stable funding for 12 months (NSFR) without needing taxpayer bailouts. As we commented, that’s what the 2016 proposed NSFR rule did, but that proposal has been gutted by the NSFR rule finalized today, apparently in response to objections and pressure from Wall Street’s biggest banks. For example, the proposed NSFR rule included repos and reverse repos, which are the very definition of unstable short term funding, have been a consistent source of instability, and have required repeated bailouts, including as recently as September of last year, but they are now indefensibly excluded from the final rule.

“The result is a final NSFR rule riddled with exclusions, limitations, definitions and needless complexity, making it much less effective than appears and providing innumerable opportunities for gaming by Wall Street’s banks. Not coincidentally, that created complexity and inordinate length also frustrate public scrutiny, oversight and accountability of the regulators.

“The other rule finalized today suffers from similar and, in many ways, worse deficiencies. The entire concept of Total Loss Absorbing Capital (TLAC) is an inadequate, doomed-to-fail, artificial construct created because policymakers and regulators simply refuse to do what they should do: require Wall Street’s biggest banks to have more high-quality capital to fund themselves and absorb their own losses. Because policymakers and regulators refuse to do that, they have created a convoluted “Rube Goldberg” funding mechanism called TLAC that purports to do roughly the same thing, but does not and will not work, as we have detailed here and here. The final rule issued today has also been dangerously narrowed from the proposed rule and, regardless, simply won’t prevent bank bailouts when another crisis hits and may actually make matters worse. 

“Given the length and complexity of the actions taken today by the banking regulators, Better Markets will continue to review them and comment as appropriate.”

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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.com.