Be Careful What You Wish For

George Yacik - Contributor - Fed & Interest Rates -

When doing some background research for this column, I came across this article in the May 12, 2017, edition of the Los Angeles Times: “Something Trump and Elizabeth Warren Agree On: Bringing Back Glass-Steagall to Break Up Big Banks.”

Whatever happened to that idea?

As kookie and wrong-headed on other issues as Senator “Pocahontas” often is, she’s at least been pretty consistent when it comes to her view of the banking industry (she doesn’t like it). And according to the article, she wasn’t alone in wanting to “break up the biggest U.S. banks.” Guess who else was on that list? None other than departing White House chief economic advisor Gary Cohn.

Trump himself said, “We’re looking at it right now as we speak,” referring to “going back to the old system” under the Glass-Steagall Act in which commercial and investment banking were separated.

Yet since then, the pendulum has swung in the other direction. Trump, hardly a model of consistency himself, has also said on numerous occasions he wants to do a “big number” on the Dodd-Frank law of 2010. And that’s where we seem to be headed.

Just this past week , the Senate voted 67 to 32 – with 17 of the “yes” votes coming from Democrats – to move forward with a bill that would remove several restraints on the banking industry included in Dodd-Frank. Among the biggest changes would be to increase to $250 billion in assets from $50 billion the threshold under which banks would be considered to be “systemically important financial institutions” and therefore subject to stricter Federal Reserve regulation.

But the bill, whose chief sponsor is Senate Banking Committee Chairman Mike Crapo, R-Idaho, would also exempt banks with less than $10 billion in total assets from the so-called Volcker Rule, named for former Fed chair Paul Volcker, which basically prohibits banks from trading with their own money for their own account. The rule was included in Dodd-Frank but took five years to implement, bottled up by aggressive lobbying by banks complaining that it’s unfair and overly complex.

Now to the rescue rides Randal Quarles, the Fed’s vice chair for supervision, i.e., the main regulator of the biggest banks. In a speech to the Institute of International Bankers, Quarles said the Fed is considering “broad revisions” to the rule. “I believe the regulation implementing the Volcker rule is an example of a complex regulation that is not working well,” he said. “We would like Volcker rule compliance to be similar to compliance in other areas of our supervisory regime.”

So, are “doing a big number” on Dodd-Frank and revising the Volcker rule a wise thing? Do we really want to go back to the “old system,” meaning the financial environment that preceded the global financial crisis of 2008 and the Great Recession that followed? Or should we really consider going back to the “really old system,” meaning life under Glass-Steagall, which was essentially repealed in 1999 and many believe ushered in the aforesaid crisis and recession?

Proponents of the Crapo bill argue that Dodd-Frank unfairly punished small and regional financial institutions that had little or nothing to do with causing the crisis so rolling it back is only fair and overdue. But loosening regulations on a larger set of even larger banks doesn’t seem like the best way to keep the financial system safe.

There is lots to Dodd-Frank that never made any sense, starting with the irony that the principal sponsors of the act – former Sen. Christopher Dodd, D-CT, and former Rep. Barney Frank, D-Mass. – Played an outsize role in causing the financial crisis, given their bullying of lenders to make mortgage loans to people who never had a prayer of repaying their loans. It also made no sense that the law, one of whose chief goals was to rein in big banks, only just made them even bigger.

So there’s some validity to the belief that the law needs to be amended a little, especially given that it has also played a major role in stifling economic growth over the past ten years.

Yet, let’s also not forget that banks – no matter how much bigger they’ve gotten under Dodd-Frank – are also a heck of a lot safer. And they’re also a lot less reckless in their behavior thanks to the Volcker Rule.

As the New York Times’ Peter Eavis pointed out this week, “There may be one group of people who hope that the Fed doesn’t gut the rule: Investors in bank stocks. Since the Volcker Rule took effect in 2015, they’ve been able to worry much less about traders saddling their institutions with overwhelming losses. In fact, there hasn’t been a big trading meltdown at a large United States bank since the London Whale debacle at JPMorgan Chase, which happened prior to 2015 and arguably lit a fire under regulators to finalize the rule.”

It’s not lost on me that the one area where at least some Republicans and Democrats appear to be able to work together is on rolling back bank regulations. Not even gun control garners that much bipartisan support. But just because there’s agreement doesn’t mean it’s the smart thing to do. To paraphrase that old saying, if the system’s not broke, don’t fix it. Otherwise, it’s only a matter of time before it does break. Last time it took ten years to fix.

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George Yacik Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.