Kurt Schacht, JD, CFA, Managing Director, CFA Institute
Just a decade after the global financial crisis threw the United States into a recession that devastated the markets and sapped retirement accounts, Congress freed thousands of smaller banks from what were widely viewed as onerous regulation as part of the 2010 Dodd-Frank law to avoid a similar meltdown.
Before pointing out what we believe are the shortcomings of the rollback put into effect at the end of May, it’s worth noting that the most recent rollback is not the end of the story but the beginning of a more significant re-engineering of Dodd-Frank. For years, Republican lawmakers have been pushing to deregulate Wall Street and the May 30 proposal by the Federal Reserve to ease trading restrictions continued in the Volcker Rule, is but one more example of a more concerted push.
Regarding the Dodd-Frank rollback, our big concern has been and remains the too-big-to-fail Systemically Important Financial Institution or SIFIs. The six largest – J.P. Morgan, Bank of America, Wells Fargo, Citigroup, Goldman and Morgan Stanley — have $2.4T more in assets on balance sheet than the next 240 banks combined.
If you look at only banks with more than $250B in assets – 11 in total, including US Bank, PNC, Bank of New York, Capital One and TD Bank — the combined assets jumps to $10.5T, or $4.1T/65% more than the next 235 combined.
The new rules raising the threshold to $250B really do capture the big institutions. And allowing the Fed to monitor the next group from $100B captures the remaining big custodial and trust banks (State Street, Northern Trust).
However, the real systemic problem is the potential for overlooking the truly devastating potential of “traditional” banking, i.e., borrowing short-term deposits to lend against a limited list of long-term loan assets such as residential and commercial mortgages, in particular.
We are very concerned about any roll back of any of capital ratio/liquidity ratio/stress tests. And we’re concerned at an apparent lack of appreciation for the fact there is no room for error once the power of monetary and fiscal policy tools to mitigate a crisis are spent. We are not prepared for the next crisis as in light of this, rolling back defenses to protect investors, savers and the economy seem ill-advised.