Is Congress sowing the seeds of the next financial crash?
“The American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more taxpayer-funded bailouts. Period.”
They are the words of President Obama when, in 2010, he signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The mammoth 2,300 page Act introduced stricter regulation of the financial sector and established various bodies to ensure compliance and protect consumers. This week, a bill seeking to roll back some of the regulatory requirements of Dodd-Frank was back in the Senate. The House of Representatives have already passed a more ambitiously deregulating bill. President Trump has vowed to “do a big number” on Dodd-Frank, to give the Act “very major haircut”.
Critics of the Act believe the banking regulation put in place under Obama is onerous, making it more difficult for families and small businesses to obtain loans, which in turn acts as a drag on growth. To try and free up smaller banks to lend, the Senate bill seeks to remove institutions with assets below $250 billion from the strictest federal oversight, including stress tests which explore the ability of a bank to withstand an economic crisis. The threshold is currently $50 billion (which even former Congressman Barney Frank now believes is too low) – but it’s a huge leap to $250 billion. Vox point out, for example, that Countrywide Financial, one of the largest subprime mortgage lenders involved in the financial crisis, had assets around $210 billion when it collapsed.
Stymying responsible borrowers’ access to credit is bad news for the economy, but so too is introducing more risk. The Congressional Budget Office, the federal agency that provides economic analysis for Congress, says the Senate bill will do just that. The exemptions, the CBO says, would make a bank failure more likely (though, let’s be clear, not probable) which in turn increases the likelihood of a taxpayer bail-out. In other words, President Obama’s promise of “never again” is looking rather shaky.