Charles Geisst is a professor of economics and finance at Manhattan College. He’s the author of 20 books, including “Loan Sharks: The Birth of Predatory Lending” and “Wall Street: A History.” The opinions expressed in this article are his own.
Congress is in the process of rolling back several of the Dodd-Frank regulations passed in the wake of the financial crisis.
While the proposed changes will loosen the cumbersome restrictions on small banks, they could pave the way for further deregulation and put big banks on the path of becoming too powerful once again.
The Dodd-Frank financial reforms were designed to protect the financial system from another near collapse like the one that occurred in 2008.
At the heart of that meltdown was the deregulation that occurred in 1999, when Congress repealed the Glass-Steagall Act.
At that time, Congress replaced Glass-Steagall with legislation that enabled banks to own securities firms and vice versa. It was only a matter of time before banking and securities operations became indistinguishable and banks were exposed to wild swings in the markets. Then the losses started piling up.
Dodd-Frank was put in place to shield banks from these forces. It does this by holding annual stress tests to ensure that banks are equipped to weather another financial downturn. It also requires bank to have living wills, or plans for how they would safely be unwound in the event of a collapse.
But bankers say that the regulations are too cumbersome and costly, especially for smaller banks. At almost 2,500 pages, the regulation is indeed long and complicated and adhering to its guidelines costs banks billions of dollars.
Small banks argue it’s unfair that they must bear these costs because they do not engage in investment banking or other risky businesses that threaten America’s financial stability like the larger banks do.
The Senate sympathized when it voted to raise the threshold at which banks are considered too big to fail. Under the Senate bill, that threshold would increase from $50 billion to $250 billion in assets.
These new guidelines would exempt more than two dozen midsize US banks from some Federal Reserve oversight. That leaves many big banks still under the stricter federal oversight.
But this proposal could be just the beginning. After all, President Trump has been promising to “do a big number” on the Dodd-Frank regulations since he first took office.
Progressives, such as Elizabeth Warren, have warned Congress of the possibility that the regulations might get dismantled as well.
Bank lobbyists cannot attack all of Dodd-Frank at once, however, and protecting smaller banks was the one place almost everyone could agree on a roll-back.
But big banks need rules because they retain their grip on the economy and remain dominant, just as they did back in 2008.
More than ever before, their business models emphasize universal banking, based on all types of financial services under one roof.
Wall Street’s history has demonstrated that the largest banks have the power to inflict the most financial damage on the economy. Our long-term financial stability will depend on these disruptive forces being kept at bay by regulators.