The Trump administration has taken yet another action this year to roll back critical financial regulations that were built after the disaster of the Global Financial Crisis.
And yet, it isn’t just the people in charge at the moment, although they are leaning heavily into deconstruction. This pattern is the result of long-standing efforts by people in finance who are looking for greater advantage, combined with people in government who think the changes will enable certain goals they see as critical.
Unfortunately, as history has shown, the financial industry has a poor memory and an amazing capacity to set off on a course that will explode.
Finance Execs Hate But Need Regulation
There should be no surprise that executives in banking and finance don’t like regulation. They want the freedom to do deals they see as potentially profitable, and to a degree, that is understandable. A company that eliminates all risk cannot grow through building revenues and profits.
But, again, it is true only to a degree. Risk in finance and business always needs judicial management. Over at least the last 40 to 50 years, there’s been some enormous problem in finance that started with deregulation and risky speculation and financial “innovation”: the attempt by the Hunt brothers to corner the silver market in 1980, the Savings and Loan Crisis of the 1980s, the dot-com bubble of the late 90s and early 2000s, Long-Term Capital Management’s implosion in the late 1990s that used a hedge fund structure to avoid a lot of financial regulation, the GFC and Great Recession of 2008 and into the 2010s that came in part because of the repeal of the Glass-Steagall banking reforms of the 1930s, crypto exchange collapses in the 2020s, and I’m probably missing some examples.
Each of these was in part brought about when financiers took advantage of holes in regulations. Every time, new regulation came into existence as a reaction. And virtually every time new regulation came about to patch a problem that had developed, people in finance wanted it repealed or limited.
The Current Deregulation Binge
The Dodd-Frank Wall Street Reform and Consumer Protection Act was the congressional response to the greed, idiocy, and ineptitude of banks, insurance companies, investment banking firms, mortgage lenders, and credit rating agencies after millions found their financial lives burned to the ground. It was extensive, restructuring financial oversight, creating the Consumer Financial Protection Bureau (CFPB), instituting the Volcker Rule that limited bank speculative trading, and strengthening the whistleblower program from the Sarbanes-Oxley Act — ironically enough, another regulatory reaction to mass financial chicanery.
People in the financial industry have been calling to eliminate or weaken Dodd-Frank from the day it was passed. In his first term, Trump said that he wanted to repeal the law. Congress passed the so-called Crapo Bill (named for Idaho Republican Senator Mike Crapo) — formally known as the Economic Growth, Regulatory Relief, and Consumer Protection Act — in 2018 and Trump signed it. As Investopedia noted, among other things it eliminated the Volcker Rule and increased the size above which banks would be considered too big to fail (making anything smaller exempt from stress testing).
Trump has been antagonistic to the CFPB and has tried to shutter the agency, as The Wall Street Journal and others have reported.
Recently, the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency ended previous guidance about leveraged lending by banks.
The original guidance stated: “Recent financial crises underscore the need for financial institutions to employ sound underwriting, to ensure the risks in leveraged lending activities are appropriately incorporated in the allowance for loan and lease losses and capital adequacy analyses, monitor the sustainability of their borrowers’ capital structures, and incorporate stress-testing into their risk management of leveraged loan portfolios and distribution pipelines.”
The changed approach: “The 2013 Guidance and 2014 FAQs were overly restrictive and impeded banks’ application to leveraged lending of the risk management principles that guide their other business decisions. This resulted in a significant drop in leveraged lending market share by regulated banks and significant growth in leveraged lending market share by nonbanks, pushing this type of lending outside of the regulatory perimeter. In addition, the guidance was overly broad and captured certain types of loans that were not intended to be covered, including loans to investment-grade companies.”
This fall, regulators agreed to end extra leverage, called the enhanced supplementary leverage ratio, letting the biggest banks purchase Treasury securities without holding as much in reserves. The reason is to encourage banks to buy more of the securities, which would in theory drive up prices and reduce yields, making the cost of financing the national debt lower.
Recently, banking regulators also allowed banks to stop reporting loan modifications — a big issue in commercial real estate loans that have poorly performed — after one year. Effectively, this allows the banks to let older troubled loans roll out of reporting, reducing transparency and making it harder to track problems.
The big concern for the average person, whether they realize it or not, is that historically every time protections have been reduced and eliminated, some disaster sits on the horizon, waiting for its time.
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