Senator Elizabeth Warren challenges attempt to exempt regional banks with less than $250 billion from Dodd-Frank regulation
JESSICA DESVARIEUX, PRODUCER, TRNN: On Tuesday, the Senate Banking Committee met with witnesses representing the interests of regional banks to discuss issues around regulations. But to understand what’s being debated, you must go back to 2008. In the midst of the great recession and the subprime mortgage market crisis, taxpayers bailed out Wall Street banks with more than $475 billion. In response, Congress took action to try to reform banks’ risky behavior with the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as Dodd-Frank. When it comes to regional banks that show $50 billion dollars or more in assets simply on the books, Dodd-Frank requires banks to adhere to new regulations like stress tests to make sure that they are financially sound. Banks that fall under that criteria are technically midsize banks like SunTrust and BB&T. At the Senate Banking Committee, one witness representing this coalition of regional banks said that this affected his bank’s ability to lend to customers because of the increased overhead put in to comply with regulations. DERON SMITHY, TREASURER, REGIONS BANK: We now have more people in our organization devoted to compliance-related matters than we do for commercial lending. Let that sink in for [inaud.] SENATOR ROUNDS (R-SD): In fact, I think that crossed the financial institution world. Right now we’re talking about since 2009, I think the number I heard was three hundred thousand more people employed in financial services. And yet it’s in compliance is where they’re at, rather than in the production side of things. SMITHY: And again, Senator, I would stipulate that we’ve learned a lot through the process. We are better at understanding the risks we take. It’s better controlled, we have better concentration, risk management practices in place. There has been modeling enhancements that have come out of the crisis and the stress-testing framework that I would submit helps us make better decisions. But at the end of the day it’s the fact that we have to keep capital and liquidity in surplus to guard against risks that we think are remote, and that is capital and liquidity that can’t be used to make those loans you’re suggesting. DESVARIEUX: At the hearing, bank advocates tried to set themselves apart from Wall Street giants like JP Chase and Citibank–and pointed out that they were not too big to fail and needed the extra flexibility. They want Congress to exempt banks that have less than $250 billion of assets on the books. But MIT Professor Simon Johnson said this lowering of standards would be incredibly dangerous. PROF. SIMON JOHNSON, SLOANE SCHOOL OF BUSINESS, MIT: I really don’t think you should go to $250 billion in terms of a limit. Bear Stearns when it failed, Bear Stearns, you remember, early 2007–had a balance sheet of under $400 billion. If you have about, you allow people with a balance sheet of $250 billion, that’s at risk exposure–I mean, I could take you through the banks in the $350-400 billion range. That’s basically saying to the Fed, don’t worry about the Bear Stearns-type category. I don’t think that’s the message you want to be sending to them. DESVARIEUX: The message from both parties is to get more liquidity in the market and into the hands of consumers–with bank advocates hammering the point that new regulations have placed an unintentional burden on smaller community banks. But Democratic Senator Elizabeth Warren pointed out that these midsize banks are often using smaller institutions for political cover to make changes to Dodd-Frank. SEN. ELIZABETH WARREN (D-MA): I know some people in the banking industry want to completely exclude even more banks from Dodd-Frank’s stricter scrutiny, but the alternatives to the current $50 billion threshold raise a whole new set of problems. Professor Johnson, we’ve heard today one suggestion is to replace the $50 billion threshold with a multifactor test, so that the Fed would have to do an intensive study of every bank to determine whether they should be subject to higher standards or not. So I want to ask, do you think that’s a workable solution? PROF. JOHNSON: No, Senator. I think the Fed has a very bad track record in applying exactly that confused, multlple-criteria set of issues. They could have done that before the crisis. They had a responsibility, clear legal responsibility to do it before the crisis, and they didn’t. So I don’t think it’s a good idea to ask them to do again what they previously failed to do spectacularly. SEN. WARREN: All right. So thank you. Seems like we have some evidence, we’ve tested that approach, and it seems like this particular proposal would require the Fed to spend a lot more time on an administrative task, leaving it a lot less time to spend on actually regulating and supervising the riskiest banks, which was exactly the point of Dodd-Frank. Now, the other proposal that’s been talked about today is simply to raise the threshold to some higher number, like $100 billion or $250 billion. And the main argument I hear in support of that is banks with about $50 billion in assets wouldn’t pose any systemic risk if they failed. I think that’s what we’ve heard repeatedly today. You pointed out, Professor Johnson, that a $50 billion on-book bank can actually be a $100 billion off-book bank, posing a much higher risk. But I want to focus on another aspect. We learned, or should have learned, in the 2008 crisis that several banks can find themselves on the verge of failure at the same time. So Professor Johnson, do you think it would pose a systemic threat if two or three banks with about $50 billion on-book in assets were on the verge of failure? JOHNSON: Absolutely, Senator. In fact, the typical pattern of financial crises around the world–I used to be the chief economist of the International Monetary Fund. The typical pattern around the world is exactly what you talked about, which is that you have smaller financial institutions that are failing together, have very highly correlated portfolios, and then the thing starts to snowball, and you bring down a really big financial player, one of the biggest banks in that market. Then you’ve got a full-blown financial crisis. So I think the scenario you’re talking about is exactly typical experience of financial crises, always and everywhere. DESVARIEUX: Everywhere, including at current midsize banks, under federal rules only ten banking institutions had assets between $50-100 billion dollars. Each bank is required to provide regulators with a systemic risk report, which looks at both on-balance sheet and off-balance sheet exposure like credit and derivatives. In the latest round of reports at the end of 2003, two out of the ten banks in this midsize banks are subsidiaries of large, non-U.S. banks that recently failed the Fed’s stress test: Deutsche Bank and Santander. Some midsize banks, like Zions Bancorporation with total exposure of $75 billion, just barely passed the Fed’s stress tests. Senator Warren said with all this risky behavior, one must question if lifting the current threshold is the best way to protect the American taxpayer. SEN. WARREN: It looks like to me we can use one of two approaches. We can draw the line somewhere, like $50 billion then rely on the Fed to use its discretion to tailor its supervision appropriately, and to consider the risks that these banks may pose not only individually, but also may pose together. Or we can raise the threshold number, we can cut loose all the banks that are smaller than $100 billion or $250 billion–on-book, and who knows how much additional risk they’ve got off-book–and then hope that two or three of them don’t make the same mistakes the way the banks did in 2008 when they nearly brought down the whole economy and had to be bailed out. Me, I’d rather err on the side of being careful and covering a few banks that may not pose as much risk, rather than running the risk of another crisis that plunges our economy back into recession. And since the American taxpayers are on the hook when the economy starts to implode, I suspect that most of them would prefer that Congress be careful as well. DESVARIEUX: For The Real News Network, Jessica Desvarieux, Washington.