Bank Health, Imperiled

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But these vital measures are all under attack by the Trump administration and the Republican-controlled Congress. The stated rationale, expressed most recently in a report by the Treasury Department, is that regulation has impeded bank lending and, by extension, economic growth.

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That’s wrong. Bank lending has expanded at a decent pace in recent years; economic growth has suffered largely from Congress’s failure to provide fiscal support. What the banks and their enablers in the administration and Congress want is a return to the days when excessive risk-taking led to outsize profits. They want to turn back the clock by rolling back the rules.

History tells us that things won’t end well if that happens. Deregulation led to the financial crash in 2008. It’s safe to assume that repeating the mistake will lead to the same result.

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Knee-jerk deregulation is not the only threat to financial stability. It’s entirely possible that the system is more fragile than the Fed’s stress tests indicate. By the Fed’s calculations, capital held by the nation’s eight largest banks was nearly 14 percent of assets, weighted by risk, at the end of 2016.

Alternative calculations of capital, including those that use international accounting rules rather than American accounting principles, put the capital cushion much lower, at 6.3 percent. The difference is largely attributable to regulators’ differing assessment of the risks posed by derivatives, the complex instruments that blew up in the financial crisis and that still are a major part of the holdings of big American banks.

The passing grades on the Fed’s stress tests pave the way for banks to pay their largest dividends in almost a decade. The hands-down winners will be shareholders and bank executives, who could see their stock-based compensation packages expand further.

But without continued bank regulation, and heightened vigilance of derivatives in particular, the good fortune of bank investors and bank executives is all too likely to come at the expense of most Americans, who do not share in bank profits but suffer severe and often irreversible setbacks when deregulation leads to a bust.

It has happened before.


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