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August 18, 2016

Financial Refom Newsletter: Breaking news on too-big-to-fail and more…

BREAKING NEWS on Too-Big-to-Fail:  The Financial Stability Board (FSB) just reported that the “World’s Biggest Banks Still Pose Too-Big-To-Fail Risk“:  “The world’s biggest banks still can’t be wound down in an orderly manner nearly eight years after the financial crash, the Financial Stability Board said, calling for renewed efforts to tackle the risks posed by too-big-to-fail firms.”  OK, this is not really breaking news, as proved by the Fed’s and FDIC’s recent failing grades on Wall Street’s biggest banks resolution plans (so-called “living wills”) and Minneapolis Fed President Neel Kashkari’s year-long project analyzing transformational changes needed to end too-big-to-fail.   

And, we’ve been saying this for some time, but Wall Street’s biggest banks, their trade groups and their other (mostly purchased) allies have been falsely claiming that too-big-to-fail has ended.  While laughable and contrary to fact, logic and common sense, they repeatedly claim it with vigor if not vitriol, as demonstrated in a recent back and forth in Politico’s Morning Money by Ben White hereherehere and here.  

The FSB and others, however, prove the point:  we’ve made a lot of progress since 2008 in reducing the unique existential risk from the biggest financial firms, but we still have a long way to go to ending that risk.  Wishing it away or pretending it is gone not only won’t work, but is a grave disservice to the American people, who continue to suffer from the economic calamity the financial crash caused. 

Preventing the Next Financial Blowout: A Conversation with Dennis Kelleher“: 

Jared Bernstein, Vice President Biden’s former chief economist and now senior fellow at the Center on Budget and Policy Priorities (CBPP), asked Better Markets’ President and CEO Dennis Kelleher about Hillary Clinton’s financial reform plans and her ties to Wall Street, the state of financial reform generally, the CFPB and lots more.  Here’s are some highlights (you can read the full interview in the Washington Post here):

“First and most importantly, [Clinton] is focusing on Wall Street’s biggest too-big-to-fail firms and their most predatory, dangerous, high-risk and profitable activities….  We should all worry about any candidate with ties to the biggest, most politically powerful financial firms, which pose a unique threat to the financial system, the economy and the standard of living of all Americans….. [Trump’s] policies would almost certainly lead to another financial crash, more bailouts for Wall Street and another deep recession…. Financial regulation is much better today than it has been in decades…. If the CFPB was an Olympic competitor, it would be Michael Phelps with dozens of gold medals, only better…. The next president must appoint the strongest people possible to all the agencies and departments and ensure that they are committed and willing to fully and effectively implement and enforce Dodd-Frank specifically and financial reform generally.” 


Treasury Report:  Financial Reform Not Hurting Community Banks: The White House Council of Economic Advisers published a report defending the Dodd-Frank Act and its impact on community banks.  The Dodd-Frank law was required in response to the worst financial crash since the Great Crash of 1929, which caused the worst economy since the Great Depression of the 1930s-a catastrophe that was caused by too-big-to-fail financial firms’ risk-taking, recklessness, and sometimes illegal conduct (as detailed here). That’s why the Dodd-Frank Act was focused on the too-big-to-fail firms, which, if regulated properly, should also level the playing field for community banks and revitalize the economy.  

For years prior to the crisis, the biggest banks dramatically increased their leverage and left themselves critically undercapitalized, packaged poorly underwritten subprime mortgages into deceptively valued securities, and focused on short-term profits at the expense of the long-term viability of their companies and the U.S. economy. And at the expense of America’s workers, families, and communities. 

The report makes clear that Dodd-Frank regulation is not killing community banks because of the following reasons: 

1. Lending by all but the smallest community banks has increased since 2010.

2. Access to bank offices at the county level remains robust.

3. The average number of bank branches per community bank has increased.

Of course, what has really hurt community banks is what has hurt communities generally: the economic catastrophe caused by the financial crash that caused widespread unemployment, underemployment, wage stagnation, bankruptcies (individual and corporate), small business collapse and so much more.  As a result, individuals, families and businesses have de-leveraged and are economically fragile and cautious.  Remember that the U-6 rate is still almost 10%, almost one in five homes in the US are effectively under water, consumers have almost $4 trillion in non-real estate debt, and savings have been wiped out.

The lifeblood of community banks is local customer demand for consumer, housing and business loans (small, medium and large) and the ongoing poor economy has simply caused there to be too little demand for such loans and the loans that have been made are much less profitable due to the Fed’s zero interest rate policy (itself an unprecedented response to the 2008 financial crash), which has dramatically reduced the amount of money they can make on the loans that get made.  Thus, community banks have been hit with a double-whammy since the crash.

Dodd-Frank needs to be fully implemented to protect our financial system, our economy, our standard of living and our community banks.  That must be done with a laser-focus on the highest risks and the handful of too-big-to-fail firms that pose the greatest threats.  Calibrating regulation on a risk basis is what will level the playing field, protect community banks and get finance back in the business of supporting the real economy, jobs, growth and widespread prosperity. 


Risk Based Capital is Far Too Risky:  When House Financial Services Chairman Jeb Hensarlng (R-TX) unveiled his dangerous and ill-conceived plan to dismantle the Dodd-Frank Act, he touched off a debate about the appropriate level and type of capital banks should have. (“Capital” in the bank context means equity.)  In particular, in addition to wrangling over the amount, the debate has focused on risk-based capital versus a leverage ratio in determining a bank’s resilience, which is based on the equity cushion to absorb losses, avoid failure and prevent bailouts. 

The latest salvo in the debate comes from Federal Deposit Insurance Corporation (FDIC) Vice Chairman Thomas Hoenig who weighed in with an op-ed in the Wall Street Journal presenting a data-driven analysis showing that risk-based capital is too risky and that a leverage ratio is essential.  While this can be a technical, hard to understand debate, Hoenig presents it clearly and in an understandable way.  All who care about preventing financial crashes and regulating finance should carefully read it.  

Should Public Advocates like Better Markets be Heard in Court Challenges to DOL’s Fiduciary Rule? As reported in last week’s newsletter, Better Markets filed an amicus (“friend of the court”) brief in one of the many lawsuits filed by the industry to try to kill the Department of Labor’s best interest fiduciary duty rule.  However, the industry plaintiff in that case, Market Synergy, is urging the court to reject the amicus briefs, claiming that the parties are fully capable of fully and fairly presenting all the issues to the court on the their own.

Their attempt to silence Better Markets is nothing more than an attempt to prevent the court from considering key information and a unique perspective about the legal and factual disputes the court must decide.  But don’t take our word for it.  Others have now weighed in on the topic, not only agreeing that amicus briefs are a useful and important contribution to these suits, but also citing several of Better Markets’ arguments in this case as particularly well-taken.



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