Regulation

Dwight Cass

Banks’ Corona Response Lives Down to Worst Expectations

Hard to argue with nonprofit Better Markets’ scathing take on banks’ grotesque attempt yesterday to use the Corona Crisis to slip their regulatory leash. From Better Markets:

Wall Street Biggest Banks Shamelessly Trying to Use Coronavirus to Get Federal Reserve to Weaken Rules

March 2, 2020

FOR IMMEDIATE RELEASE
March 2, 2020
Contact:  Christopher Elliott, 202-618-6433, press@bettermarkets.com

Washington, D.C.  –  Dennis M. Kelleher, President and Chief Executive Officer of Better Markets, issued the following statement in response to the Bank Policy Institute’s request for “Actions the Fed Could Take in Response to COVID-19”:

“It is shameless but not surprising, that Wall Street’s biggest banks would use the coronavirus to attack the financial rules they have been trying to weaken for a decade, including weakening critically important capital and liquidity requirements.  It is even less surprising that they would direct their request to their favorite regulators at the Federal Reserve, which secretly doled out trillions of dollars bailing out Wall Street in 2008-2009 with virtually no public transparency, oversight or accountability.  That was great for Wall Street’s biggest banks, but a disaster for Main Street and should not be repeated now.

“As the coronavirus-created uncertainty mounts and the possibly of financial deterioration increases, the worst thing anyone could do is reduce the biggest banks’ ability to withstand a downturn or shock, which is exactly what Wall Street’s biggest bank lobby group is arguing.  Reducing capital and liquidity while preemptively taking action under Section 13(3) just tees up more taxpayer bailouts and makes them more likely. 

“Most importantly, current conditions relate to the entire economy and financial system, not just Wall Street’s biggest banks.  Rather than one-off reactions to the importuning of a subgroup of self-interested financial actors, the Financial Stability Oversight Council (FSOC) should be meeting and planning daily to be prepared for a comprehensive response if economic activity decreases dramatically and financial conditions deteriorate.  The FSOC was created for these very circumstances:  to provide a coordinated response for the entire financial system in the best interests of the country, not just the best interests of Wall Street’s biggest banks.

“Finally, to the extent Wall Street’s biggest banks are genuinely concerned about having enough capital and liquidity to support the real economy, then they should immediately stop making any additional distributions of capital via dividends or buybacks until there is certainty regarding the threat posed by the coronavirus.  If Wall Street’s biggest banks are unwilling to take that action immediately, then their real motives will be clear, and their deregulatory requests should be seen for what they are: part of their ongoing, years-long attack on the rules.”

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Dwight Cass

Volcker Rollback is a Camel’s Nose Under the Wrong Tent Flap

It all seems reasonable. New rules from the Fed, OCC and FDIC would only tweak technical bits of the Volcker Rule to ease bank business interactions with hedge funds and private equity. What’s wrong with that? After all, the 3 percent limit on direct ownership of these funds remains in place, ostensibly keeping banks from running amok and reviving the risky proprietary trading businesses that the rule, part of the Dodd Frank reforms passed in response to the Global Financial Crisis, effectively quashed. Banks and regulators portray the measure, out for public comment until April 1, as an exercise in fine tuning, rather than a strategic change.

That might be the case. But the rule change, along with other mods to compliance regulations related to prop trading made last summer, reflect how financial regulation is subject to its own version of the second law of thermodynamics. The regulatory trend is always toward entropy. And this is troubling.

Many at the time of its passage thought the Volcker Rule was downright draconian, separating banks from one of their core revenue-generating businesses. Hotshot traders left investment banks in droves in order to set up their own hedge funds, only to step into a decade-long performance abyss for active managers, where buying a dirt-cheap index-tracking ETF was almost always a better bet than paying 2 and 20 to some guy in red suspenders who never beat the market. The archetypical alpha chaser struggled along like a fat man running after beta’s bus.

That’s still the case. So why worry? Well, to its boosters, myself included, the Volcker Rule seemed like a step toward what the financial system really needed, which was (and is) a new Glass-Steagall Act separating banking and speculative investment businesses. When Sandy Weill convinced Bill Clinton to withdraw the Act in 1999, so the former could stitch together his shambolic Frankenstein’s monster, Citigroup, it was one step on the path toward the Financial Crisis.

During the crisis, the big commercial/investment bank hybrids essentially held their massive retail deposits hostage, forcing the government to bail them out when their “financial engineering” products started blowing up in their faces. The Volcker Rule was meant to keep banks from dabbling in novel, high-risk, nontransparent investment strategies in order to avoid this happening again.

But the banks and investment banks are still joined at the hip. In some cases, even more so. Goldman Sachs is getting into retail. Morgan Stanley is buying E Trade – admittedly, not FDIC-insured, but with over $300 billion in mostly retail assets, something the government is going to be watching closely. And there’s always Citi, with its unerring talent for stepping on every possible land mine.

Even Fitch, which did not exactly cover itself with glory during the run-up to the Financial Crisis, wrote an admirably canary-in-the-coalmine report today saying that the changes were “indicative of loosening regulation and recalibration of post-crisis regulatory rules.” The rating firm “views robust regulation and capital requirements as supportive of credit ratings; therefore relaxation would be viewed as a credit negative.”

It would be more encouraging to see bank regulators laboring to build a more robust wall between taxpayer-insured businesses and the hedge fund and private equity casinos. This mod represents a step – granted, a baby step – in the wrong direction.