It’s time to break up the big banks
Now is not the time to ease oversight and supervision of the largest financial institutions
In recent days we have learned that the three biggest banks now control more capital than before the financial crisis over a decade ago. We’ve also learned that Congress is actively working to repeal some of the protections put in place by Dodd-Frank after the financial disaster of 2007-09.
Mervyn King, former governor of the Bank of England, remarked that large financial institutions remain “too big to sail, too big to jail and too big to fail.”
The financial crisis and bank meltdown in 2007-09 was saved by a $787 billion bailout paid for by U.S. taxpayers. The bailout was followed by a massive piece of complicated financial reform legislation called Dodd-Frank. This 2,300-page law was designed to restore and ensure soundness to institutions and financial markets.
While the House and Senate navigate the future of Dodd-Frank, agencies responsible for overseeing the financial services industry have begun relaxing regulations the act placed on the biggest, most powerful banks, under-taxed credit unions and subprime lenders. When a credit union (CU) fails, the taxpayers and an under-funded insurance scheme are on the hook, but the CU hasn’t paid a dime in federal income taxes. Does that make any sense for a hugely profitable credit union?
The longest, and perhaps weakest, postwar recovery is entering unexplored territory as the Fed continues to unravel the monetary stimulus at its core. Unprecedented global economic conditions and interdependence call for closer, not laxer, supervision of the largest financial institutions. That is not what is happening.
The 10 largest banks hold almost three-quarters of all bank assets with $11.8 trillion in assets. The four largest banks possess $8.57 trillion of that pot. Industry profits are on track to reach record highs for the fifth year in the past six. Bank stock values have jumped and never before have banks lent more money.
The current administration, and its lobbies, have argued that Dodd-Frank has shackled banks and stifled the economy. Yet, while under Dodd-Frank, the largest banks have reached record profits. The public would like to believe that the “adults in charge” have their best interests at the forefront, but, with a lack of financial literacy, the public remains outwitted by the aggressive salesmanship of complex financial products. There is a decline in the public’s trust of our institutions and leaders. Consumers deserve to have the safeguards which only an independent agency can provide.
In June 2017 the House passed a bill gutting key elements of Dodd-Frank. The bill is constructed in a way that has crippled the Consumer Finance Protection Bureau, repeal the Volcker Rule restricting proprietary trading, and permit banks meeting capital requirements to take even greater risks. That bill received a modest reception from the Senate Banking and the Housing and Urban Affairs Committee.
Treasury Secretary Steven Mnuchin submitted a report to the president on banks and credit unions with nearly three dozen recommendations, only nine of which may require congressional action. Simply stated, this agenda will be pursued out of the spotlight by industry insiders negotiating changes to the interpretation and application of such regulations. The term for this is “regulatory capture.”
This process is now in motion as deregulation proceeds through the regulatory agencies. There is a conflict as these agencies are led by “insiders”: executives, lawyers and lobbyists of the industry. Seven of the recommendations in Mnuchin’s report are aimed at weakening the authority of the Consumer Financial Protection Bureau, despite abuses by banks, credit unions, payday lenders and debt collectors from which the bureau has recovered $12 billion for 29 million consumers.
At the Office of the Comptroller of the Currency, which oversees the largest banks, the acting comptroller drew criticism for easing regulations while his successor pledged to further reduce regulations. These men, one a lawyer and the other an executive, both served banks regulated by the agency. Recently, the chairman of the FDIC warned that “the danger is that changes to regulations could cross the line into substantial weakening of requirements” while a veteran of the New York Federal Reserve Bank remarked “what you are seeing [are] very subtle and significant changes in how certain regulations are being enforced.” Sheila Bair, the most recent head of the FDIC, provided a very candid interview to Barron’s magazine as well.
Noteworthy recommendations in Mnuchin’s report include relaxing the Volcker Rule, which prohibits speculative trading in securities and derivatives by banks with access to federal deposit insurance or emergency loans from the Federal Reserve. Most of these recommended revisions to the rules could be made by the agency without legislation.
The sheer size of the biggest banks, facilitated by lobbyists and Congress with the repeal of Glass-Steagall and interstate banking restraints, places them well beyond the reach of market discipline. This leaves banks nearly impossible to manage while they continue to pose a risk to the economy and taxpayers as a whole.
Now is not the time to ease the oversight and supervision of the largest banks.
The global economy is only inching towards correcting imbalances regarding savings and spending, trade surpluses and deficits, productive capacity and effective demand. In a world becoming increasingly integrated economically and fractured politically, the cooperation needed to restore balance and spur growth may prove elusive.
In New Hampshire, folks are fond of saying, “If it ain’t broke, don’t fix it.” Only the next financial crisis will tell if Dodd-Frank is broken and more stringent regulation is required to bring the banks to heel.
Taxpayers might wish to call for action before the next financial crisis.
Tom Sedoric is a fiduciary living in Rye. The views presented are the opinion of the author and may not represent the views of Steward Partners or Raymond James Financial Services. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.