This is happening at a time when interest rates have been at historic lows for nearly 10 years, public and private debt is at record levels, consumer debt loads and subprime defaults are rising, and politicians are looking to throw a bit more kerosene on the economy to seduce voters in the run-up to November’s midterm elections.
The bill, authored by Mike Crapo, the Republican head of the Senate banking committee, is being couched as a way to reduce onerous regulatory burdens on regional and community banks so that they can do more of the plain vanilla lending — to farmers, or young couples looking to buy a home — that plays well at the ballot box.
Rolling back these particular rules is not going to trigger a crisis. The US banking industry is better capitalised than it was in 2008. The next big market debacle is more likely to emanate from the corporate world than from banks.
Even so, this “reform” bill takes US in exactly the wrong direction, at precisely the wrong time. As experts such as Tom Hoenig, former vice-chair of the Federal Deposit Insurance Corporation, have pointed out, there is ample research to show that banks with higher capital levels lend more, not less. Even an equity-to-assets capital ratio of 15 per cent (about triple what institutions must hold today) significantly reduces the risk of bank failure, with only a small increase in lending costs.
Now would be a good time to raise capital standards on safe haven banks that sit at the centre of the capital markets, rather than lower them. It is always a good idea to have a cushion before the next crisis comes.
This bill will do just the opposite. It will also roll back the Volcker rule prohibitions on proprietary trading done by banks with less than $10bn in assets. It is true that those institutions rarely gambled before. But in an environment in which bank margins are likely to remain compressed for a variety of reasons (including weak demand and competition from lower-priced Silicon Valley rivals), will even smaller institutions resist the temptation to reach for higher yields in the future? Probably not.
The latest Dodd-Frank rollback bill comes, of course, at a time when financial deregulation efforts are also gaining steam at the Treasury, the Securities and Exchange Commission, the US Federal Reserve, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission and so on.
Is this where US wants to be at the end of a recovery cycle, with debt loads at record levels and the interest rate environment changing? No. Sadly, short memories and rollbacks of post-crisis reform are another common refrain in financial history.
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