Is the US condemned to repeat the past?
While the economy remains the strongest it has been in years, concern is growing that recent revisions to the country’s banking regulations could bring an end to the current record-long bull market.
Critics are warning that those regulatory changes — scheduled to take effect on Jan. 1, 2020 — will greatly increase the risk of US taxpayer bailouts by allowing banks to return to the kinds of risky and lucrative proprietary trading in which they had been engaged leading up to the financial crisis of 2007-2008.
The regulations in question are housed under the Volcker Rule, which was made mandatory in 2015 as part of the 2010 Dodd-Frank Act. The rule, which imposed strict limits on speculative bank trading of derivatives, hedge funds and other risky assets, was intended to avoid the need for future bailouts.
The changes to the Volcker Rule, which have been endorsed by the FDIC and the Comptroller of the Currency (with the Fed, the SEC and the Commodity Futures Trading Commission expected to follow suit shortly), grants “regulatory relief” by exempting smaller (less than $20 billion in assets) banks entirely from its provisions.
Larger banks — which are most likely to engage in proprietary trading — are also given greater leeway to speculate with depositor money.
“At the holding company level, about 25% of the financial instruments subject to the current rule and the 2018 [changes] would no longer be subject to the prohibition on proprietary trading,” FDIC board member Martin Gruenberg said in his dissent to his agency’s 3-to-1 approval of the revisions. At the bank level, “the final rule would exclude about 46 percent — nearly half — of financial instruments from the Volcker Rule that are subject under the current rule,” he added.
These exemptions would amount to opening up the slot machines at your local bank, critics say.
“With fractures in the global economy threatening a real stress test for America’s megabanks, the FDIC should not open the door for American bankers to gamble casino-style with depositors’ money,” said Lisa Gilbert, VP of legislative affairs at the consumer rights advocacy group Public Citizen.
Joe Sergienko of Navigant Consulting offered a more nuanced view.
“This is better for the banks now that regulators are listening to the industry,” he said, admitting that “some of the revisions [to the Volcker Rule] are perhaps too lenient, but they are relatively reasonable.”
Reasonable or not, others offer the opinion that, given risks to the global financial system, now may be the wrong time to significantly ease up on banking regulations.
“We’re in the longest economic expansion in history and we’re seeing a potential bubble created by the tax cuts and artificially low interest rates,” said Dennis Kelleher, president of Better Markets, a nonprofit think tank. “This brings back the self-policing that caused the 2008 crash … This is significant deregulation coming at the worst possible time.”
To financial consultant Mayra Rodriguez Valladares of MRV Associates, it threatens to be a case of history repeating itself.
“I read somewhere that two-thirds of the people working on Wall Street are under 40,” she said. “It’s not that they forgot the financial crisis of 2008. They never experienced it in the first place.”