Trying to Balance Financial Regulations

Can the rules be rolled back some without rolling them back too far?

Last week the Senate passed bill S.2155, to exempt a number of smaller financial institutions from a range of regulations that were implemented in response to the 2008 financial crisis. The bill, called the “Economic Growth, Regulatory Relief, and Consumer Protection Act” was passed with yes votes from all Republican Senators who attended and also from 13 moderate Democrats. It’s up in the air whether or not it will receive the same level of bipartisan support in the House.

If it does become law it will mean that banks and credit unions with less than $10 billion in assets can relax the standards by which they evaluate borrowers for certain residential mortgage loans. It also allows these smaller financial institutions greater flexibility in terms of the types of financial relationships they can enter into with hedge funds and private equity funds. And it makes changes relating to which banks are considered “systemically important” and are subject to annual stress tests by the government.

Irresponsible lending and risky relationships between banks and other types of financial institutions were major contributing factors to the 2008 global economic meltdown and regulations to try and reign in these practices were enacted as part of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. S.2155 is the biggest rollback so far of the portions of Dodd Frank that govern financial institutions. Some of the language of S.2155 also applies to older financial rules.

Unsurprisingly the bill seems to have unanimous support from Republican lawmakers, while on the Democratic side things are decidedly more complicated. Democrats who oppose the bill are categorizing it as a favor for the banking industry, which puts the country at risk for another financial crisis. Those who support it claim that it will lower the cost of loans and help the small financial institutions that are important for the economic health of small and rural communities.

The truth is these are not mutually exclusive assertions. It is probably impossible to create a regulatory framework that is neither overly burdensome nor overly risky. Loosening up regulations will allow these banks and credit unions to promote economic growth in their communities, and it will also increase the chance of them making bad choices that could eventually cause a financial crisis.

In some ways the longevity and strength of Dodd Frank can be used to measure how well the U.S. government remembers and learned from the 2008 crisis. S.2155 is a significant rollback but it is less drastic than other measures that have been introduced recently. This could mean that even a Republican led government recognizes that some regulations are necessary to protect the country from a repeat of its past mistakes. But if this bill passes the House and is signed by the President, and if it paves the way for more substantial dismantling of Dodd Frank, then it will be up to financial institutions and American borrowers themselves to change their behavior so as not to trigger another collapse.

Comments
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A_Chapman
A_Chapman

Editor

There seems to be some sort of pendulum swing between over regulation of the financial sector and not enough regulation, and I hate to say it but it seems like the consequences of not enough regulation are worse than the consequences of over regulation so maybe that's the side we should be erring on. But it would be nice if we could learn from the past and find some sort of middle ground that allowed our financial sector room to take some risks and help the economy grow without bringing the whole thing to the brink of collapse every few decades.

A_Chapman
A_Chapman

Editor

@Saltz If I'm understanding the new legislation correctly the current version of this bill will make it easier for small banks to have situations where investment banking is intermingled with commercial banking, which is concerning. That combination was a big part of what made the 2008 financial crisis so far reaching, but that was because large banks also had no barriers between the two, because the restrictions were lifted during the Clinton administration I believe. So if this passes as is then I guess we'll see, maybe the investment banking/ commercial banking relationship won't be a problem if it's limited to small banks. I don't think that just removing these restrictions for small banks will set us up for a repeat of 2008, but I do think that if this goes awry and these smaller banks can't act responsibly then the people that suffer will be those in small, rural, and financially struggling communities which rely on these smaller financial institutions.

ThreePatriots
ThreePatriots

Editor

I'm with you @A_Chapman. I am generally a proponent of less government intrusion, but also with the understanding that some regulation is necessary due to the points that @Saltz brought up with the banks and their greed. Thanks for this article because I hadn't heard much about this until now!

Jon Saltzman
Jon Saltzman

Editor

I'm afraid you're right Alexis- but bankers haven't shown any ability to restrain themselves from their greed and have always pushed the limits. I am particularly worried about investment banking combined with commercial banking. Does the new legislation address this in any way?

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