If Dodd-Frank is So Bad for Banks, Why Are They Making So Much Money?

Never let the facts get in the way of a good story goes the saying, and despite the fact that banks profits rose 10.7% in the Second Quarter of 2017, up $4.7 billion from a year earlier, banks and their allies in the Trump Administration are still pushing the repeatedly debunked myth that the Dodd-Frank Act has harmed bank profitability and restricted economic growth.

Indeed, when announcing the results, FDIC Chair Martin Gruenberg said,

“The bottom line is the industry remains in pretty good shape and is a source of strength and stability for the economy.”

If that weren’t enough, there was additional data in the FDIC’s release of bank results that further undercuts the industry’s talking points.  Community banks saw their profits rise as well, increasing 8.5% from a year ago.  And, in direct contradiction of the banking industry’s other favorite talking point (that financial protection rules have stymied bank lending), bank loan activity increased 3.7% over last year.  And while banks like to decry what they see as a decrease in loans because of additional regulations, Chairman Gruenberg took that point head on, commenting,

“The issue seems to be more related to the question of demand for loans rather than industry’s ability to provide credit.”

Put differently, the problem is not a credit supply problem.  It is a demand problem due to a lack of creditworthy borrowers and consumers creating demand.  That is directly due to the broad and deep economic costs that the 2008 financial crash inflicted on tens of millions of Americans families, many of whom are still suffering today from un- and underemployment, wage stagnation, underwater or nonexistent home equity, decimated savings, astronomical student loan debt, among so many other costs. 

Sadly, the banking industry and its allies are unlikely to acknowledge the overwhelming mountain of evidence that directly contradict their favorite talking points.  After all, rolling back financial protection rules and returning to the risky, Wild West days of Wall Street before the crash is their goal, which would be a big boost to their bonuses – their ultimate goal.  But, as we saw from 2002-2007, big bonuses on Wall Street means big risks for Main Street.  That’s why we have the financial protection rules: to make sure Wall Street supports the real economy, jobs and growth and not be a threat to them.  The most current facts available prove that is exactly what has happened.  Financial reform is working.  Main Street is safer.  Banks are very profitable, lending and supporting America’s families, communities and businesses.

Fed Chair Yellen Makes the Case That Dodd-Frank Is Working & FDIC Vice Chair Hoenig Refuses to Allow TBTF Banks to Hide Behind Community Banks And Undo the Volcker Rule

At what might be her last appearance at the annual Jackson Hole symposium as Chair of the Federal Reserve Board, Janet Yellen sent a clear and compelling message to those in Washington and on Wall Street about the dangers of deregulation, delivering a speech entitled, “Financial Stability a Decade After the Onset of the Crisis.”  She made a number of points worth highlighting:

On how the U.S. responded to the crisis and the overall effectiveness of that response:

“In response, policymakers around the world have put in place measures to limit a future buildup of similar vulnerabilities. The United States, through coordinated regulatory action and legislation, moved very rapidly to begin reforming our financial system, and the speed with which our banking system returned to health provides evidence of the effectiveness of that strategy.“

On the effects of capital rules on lending:            

“The steps to improve the capital positions of banks promptly and significantly following the crisis, beginning with the 2009 Supervisory Capital Assessment Program, have resulted in a return of lending growth and profitability among U.S. banks more quickly than among their global peers.”

On the impact of financial rules on market liquidity:

“Market liquidity for corporate bonds remains robust overall, and the healthy condition of the market is apparent in low bid-ask spreads and the large volume of corporate bond issuance in recent years.”

On remaining challenges:

“We can never be sure that new crises will not occur, but if we keep this lesson fresh in our memories–along with the painful cost that was exacted by the recent crisis–and act accordingly, we have reason to hope that the financial system and economy will experience fewer crises and recover from any future crisis more quickly, sparing households and businesses some of the pain they endured during the crisis that struck a decade ago.”

Chair Yellen wasn’t the only top official pointing out the importance of the financial protection rules put in place over the course of the last decade. The Federal Deposit Insurance Corp. (FDIC) Vice Chair Thomas Hoenig rebutted the industry’s criticism of the Volcker Rule in an op-ed in American Banker, “Volcker Rule rollback is not the kind of reg relief small banks need.”  He again takes on one of the most often used tactics used by Wall Street in arguing against even the most sensible and modest rules: using community banks as cover for their deregulatory agenda.

Vice Chair Hoenig decided to offer some insight into his conversations with bankers and shined a light on just how little community banks are concerned with this regulation saying:

“I am disappointed that the Volcker Rule continues to be characterized as a burden to community banks…This argument appears misleading and for the purpose of implementing broader rollbacks of the Volcker Rule.  I regularly meet with hundreds of community bankers from around the country, and while they voice major concerns about regulatory burden, the Volcker Rule is not one they highlight.” 

“However, a blanket exemption from the Volcker Rule for banks under a certain asset size…seems imprudent and certainly unwarranted. In fact, doing so would only reinstate the use of insured deposits to be freely invested in opaque hedge fund-type vehicles subject to extreme volatility in their promise of ever-higher yields, while doing little to further the mission of a community bank.”

Once again, the country’s top financial officials refute the country’s biggest banks’ claims deployed to support mindless and baseless deregulation. Repeatedly over the last decade, Wall Street and its allies have cloaked deregulation as beneficial for community banks. But, those who stand to gain the most for Wall Street’s deregulation agenda are Wall Street’s biggest and most dangerous “too-big-to-fail” banks, which will put jobs, homes, savings and taxpayer dollars at risk once again.

As the cries for deregulation grow louder by the day from the President, his administration, Wall Street and their allies, Fed Chair Yellen and FDIC Vice Chair Hoenig have again set forth the facts that prove financial reform is working and in the best interests of all Americans.  They have also made clear that a strong, well-capitalized and well-regulated banking system that supports the real economy will create durable and sustainable economic growth.