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 here, here, here 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. 

 

 

“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.