Trump Considers Shrinking or Abolishing Bank Regulation

[4Q Basket Case]

According to this article from the WSJ, Trump is considering a material shrinkage of agencies that regulate the country's financial system.

Exclusive | Trump Advisers Seek to Shrink or Eliminate Bank Regulators - WSJ

This is jaw-droppingly dangerous.

Without getting into the geeked-out accounting, banking is one of the few industries (maybe the only one) where you can lose many times your potential revenue, and 50 - 100 times your potential profit, on any given transaction.

With that level of downside (huge) and unusually limited upside, you have to be highly risk-averse to stay in business.

Regulators have rightfully earned a bad reputation for the way they've handled a lot of things. And generally speaking their reaction to botched performance has been to cry for more regulation.

The truth is they have the power to do their jobs properly, and have had it for decades. They should enforce the existing regulations more stringently. When they scream for yet more regulations to enforce, they're just passing the buck....essentially saying that the latest crisis wasn't their fault, and if only they'd had more regulations to help them do their jobs, the failure wouldn't have happened. But I digress.

Eliminating or neutering bank regulation will lead to nasty crises because the suits will pursue ever-riskier practices in the chase for more profit. The profit will be short-lived, the markets will correct the wretched excess, the ensuing collapse will cost many times more than the profit garnered, and the taxpayer will be left holding the bag.

This is coming from someone who spent a good deal of his banking career dealing with regulators. The fact that they're not perfect doesn't mean the industry doesn't need them.

 

[jthomas666]

According to this article from the WSJ, Trump is considering a material shrinkage of agencies that regulate the country's financial system.

Exclusive | Trump Advisers Seek to Shrink or Eliminate Bank Regulators - WSJ

This is jaw-droppingly dangerous.

And completely predictable.

 

[Jon]

"regulations are bad m-kay"

"we" wrote these clowns a blank check and they are going to destroy anything that ever held their grifts back

period

 

[Bamaro]

Nothing that this fool says is surprising. He is an ignoramus and only listens to 'the last person in the room'. Im sure the meltdown 15 years ago means nothing to him.

 

[TIDE-HSV]

According to this article from the WSJ, Trump is considering a material shrinkage of agencies that regulate the country's financial system.

Exclusive | Trump Advisers Seek to Shrink or Eliminate Bank Regulators - WSJ

This is jaw-droppingly dangerous.

Without getting into the geeked-out accounting, banking is one of the few industries (maybe the only one) where you can lose many times your potential revenue, and 50 - 100 times your potential profit, on any given transaction.

Regulators have rightfully earned a bad reputation for the way they've handled a lot of things. And generally speaking their reaction to botched performance has been to cry for more regulation.

The truth is they have the power to do their jobs properly, and have had it for decades. They should enforce the existing regulations more stringently. When they scream for yet more regulations to enforce, they're just passing the buck....essentially saying that the latest crisis wasn't their fault, and if they'd only had more regulations to help them do their jobs, the failure wouldn't have happened. But I digress.

Eliminating or neutering bank regulation will lead to nasty crises because the suits will pursue ever-riskier practices in the chase for more profit. The profit will be short-lived, the markets will correct the wretched excess, the ensuing collapse will cost many times more than the profit garnered, and the taxpayer will be left holding the bag.

This is coming from someone who spent a good deal of his banking career dealing with regulators. The fact that they're not perfect doesn't mean the industry doesn't need them.

Back to 1929. The man does have a strong nostalgic streak...

 

[75thru79]

Most people don't understand anything about bank regulations and how convoluted the whole setup is. There isn't just a singe agency that regulates commercial banks (and we'll stick with just those, the Bank of America's and Wells Fargos and the like). There are three. The OCC (Office of the Comptroller of the Currency), the FDIC (Federal Deposit Insurance Corp) and the Federal Reserve. Each one is slightly different but the goal is the same, at least as far as "regulations" is concerned) to maintain the safety of the banking system. Why do we need three? We don't, but that's how it has evolved. We should absolutely merge the regulatory aspect of these into one for efficiencies.

The other thing that most people don't understand is that a huge percentage of regulations on banks govern doing business with "underserved" communities. This is where everything gets political as you can imagine. A lot of this stuff borders on the absurd but the banking industry dares not question it for fear of being cancelled. In my opinion if they can merge the "regulations" into one entity and back off on some of the woke lending requirements then it will go a long way to making the banking industry more efficient and set us up for the remainder of this century.

 

[Jon]

Most people don't understand anything about bank regulations and how convoluted the whole setup is. There isn't just a singe agency that regulates commercial banks (and we'll stick with just those, the Bank of America's and Wells Fargos and the like). There are three. The OCC (Office of the Comptroller of the Currency), the FDIC (Federal Deposit Insurance Corp) and the Federal Reserve. Each one is slightly different but the goal is the same, at least as far as "regulations" is concerned) to maintain the safety of the banking system. Why do we need three? We don't, but that's how it has evolved. We should absolutely merge the regulatory aspect of these into one for efficiencies.

The other thing that most people don't understand is that a huge percentage of regulations on banks govern doing business with "underserved" communities. This is where everything gets political as you can imagine. A lot of this stuff borders on the absurd but the banking industry dares not question it for fear of being cancelled. In my opinion if they can merge the "regulations" into one entity and back off on some of the woke lending requirements then it will go a long way to making the banking industry more efficient and set us up for the remainder of this century.

use the word woke and completely destroy your own argument

what is "woke" in banking? Ending Red Lining? Fairness in lending practices? Help me out here

 

[75thru79]

use the word woke and completely destroy your own argument

what is "woke" in banking? Ending Red Lining? Fairness in lending practices? Help me out here

Sorry, I forgot that the word "woke" is so triggering to Progessives. Redlining is immoral and illegal and has been pretty much abolished over the last 50 years. None of the big boys do it to any extent although there may be a some community banks that push the envelope.

"Fair" lending is the main culprit. Who decides what is fair anyway? Is it fair to deny a loan to someone with a substandard or non-existent credit rating? It isn't if the person is from an identity group that has a lot of credit unworthy members. Loans that you and I would be denied with the same credit rating are granted under the Fair Lending guidelines to others. In any other world that would be considered charity or maybe good public relations but in banking it is required by law. So, we make loans to certain people, strictly for political reasons, and when the loans go bad they just get written off and hidden in with all the other stuff in the bad debt reserve.

All bankers know that you can't loan significant monies to uncreditworthy people and turn a profit because you can't charge a higher rate to those individuals due to the political fallout. So, they make just enough loans to make the regulators happy and the rest of us subsidize it. Kind of how everything works these days.

 

[crimsonaudio]

Most people don't understand anything about bank regulations and how convoluted the whole setup is. There isn't just a singe agency that regulates commercial banks (and we'll stick with just those, the Bank of America's and Wells Fargos and the like). There are three. The OCC (Office of the Comptroller of the Currency), the FDIC (Federal Deposit Insurance Corp) and the Federal Reserve. Each one is slightly different but the goal is the same, at least as far as "regulations" is concerned) to maintain the safety of the banking system. Why do we need three? We don't, but that's how it has evolved. We should absolutely merge the regulatory aspect of these into one for efficiencies.

Thanks for this - do you work in the banking industry? I ask because like @4Q Basket Case (whom I know worked in banking) you seem to know a lot about the inner workings of the industy.

Regardless, I appreciate the info - it highlights once again the inefficiencies of the fedgov. I do believe regulation is needed in banking, but having it spread out like that seems highly inefficient.

 

[Bodhisattva]

Sorry, I forgot that the word "woke" is so triggering to Progessives. Redlining is immoral and illegal and has been pretty much abolished over the last 50 years. None of the big boys do it to any extent although there may be a some community banks that push the envelope.

"Fair" lending is the main culprit. Who decides what is fair anyway? Is it fair to deny a loan to someone with a substandard or non-existent credit rating? It isn't if the person is from an identity group that has a lot of credit unworthy members. Loans that you and I would be denied with the same credit rating are granted under the Fair Lending guidelines to others. In any other world that would be considered charity or maybe good public relations but in banking it is required by law. So, we make loans to certain people, strictly for political reasons, and when the loans go bad they just get written off and hidden in with all the other stuff in the bad debt reserve.

All bankers know that you can't loan significant monies to uncreditworthy people and turn a profit because you can't charge a higher rate to those individuals due to the political fallout. So, they make just enough loans to make the regulators happy and the rest of us subsidize it. Kind of how everything works these days.

I got pretty close to a front row seat to the "fair" lending nonsense in the 2000s while working for a homebuilder until the 2008 crash. There's a significant subsidy that responsible people have to pay in the cost of their homes and the cost of their mortgages so they can carry irresponsible people at the requirement of government policy (federal and local). And then when government policy severely distorts the economy and eventually implodes a sector of the economy, the government will then blame the very industries their policies damaged in the first place. There is never a policy bad enough that it can't be made worse by more policy.

 

[jthomas666]

Most people don't understand anything about bank regulations and how convoluted the whole setup is. There isn't just a singe agency that regulates commercial banks (and we'll stick with just those, the Bank of America's and Wells Fargos and the like). There are three. The OCC (Office of the Comptroller of the Currency), the FDIC (Federal Deposit Insurance Corp) and the Federal Reserve. Each one is slightly different but the goal is the same, at least as far as "regulations" is concerned) to maintain the safety of the banking system. Why do we need three? We don't, but that's how it has evolved. We should absolutely merge the regulatory aspect of these into one for efficiencies.

The other thing that most people don't understand is that a huge percentage of regulations on banks govern doing business with "underserved" communities. This is where everything gets political as you can imagine. A lot of this stuff borders on the absurd but the banking industry dares not question it for fear of being cancelled. In my opinion if they can merge the "regulations" into one entity and back off on some of the woke lending requirements then it will go a long way to making the banking industry more efficient and set us up for the remainder of this century.

All of this may well be true...but I don't think it pertains to the WSJ article. They don't want to streamline regulations, they want to gut them.

 

[TIDE-HSV]

Thanks for this - do you work in the banking industry? I ask because like @4Q Basket Case (whom I know worked in banking) you seem to know a lot about the inner workings of the industy.

Regardless, I appreciate the info - it highlights once again the inefficiencies of the fedgov. I do believe regulation is needed in banking, but having it spread out like that seems highly inefficient.

Tonight, I heard that Trump allies want to destroy the FCI. Now, that is going back to 1929. That threatens the world economy...

 

[crimsonaudio]

Tonight, I heard that Trump allies want to destroy the FDIC. Now, that is going back to 1929. That threatens the world economy...

I'm probably naive, but I've no idea how this would help anyone - even the ultrarich.

 

[TIDE-HSV]

I'm probably naive, but I've no idea how this would help anyone - even the ultrarich.

I can make no sense of it at all. Perhaps it might reduce the banks' premiums...

 

[Bamaro]

I'm probably naive, but I've no idea how this would help anyone - even the ultrarich.

They want to just blindly eliminate regulation.

 

[4Q Basket Case]

Apologies in advance for the length. Bank regulation is a complex thing. We need it, but it has a tendency to overreach and explaining both sides takes a while.

I've always thought that the utility of bank regulation is in telling banks what loans they can't make and what asset / liability (ALCO) practices they can't engage in.

This is absolutely necessary. Left to their own devices, the suits will gradually, bit by bit, start financing ever-riskier activity. They end up in a place they could never have imagined themselves, and you get something like the crash of 2008. Or 1985. Or 1974.

The recent problems with Signature Bank and other institutions tied into the tech industry were not caused by loan problems -- their loan portfolios were fine. The problem was that they used their deposits to buy long-term bonds. That's a Banking 001 blunder. Short term liabilities (deposits) financing long-term assets (the bonds).

Compounding that, when interest rates began to rise from historic lows, the value of the long-term bond craters. It's not because the issuer of the bond has any problems paying. It's that the amount they're required to pay (the interest coupon) is below the new market level.

In a situation like that, the value of all bonds issued when rates were really low falls. It's kind of geeky and has to do with exponential arithmetic. But the bottom line is that longer-term bonds get dope-slapped whereas shorter term ones get only a tap on the wrist.

As 75thru79 has commented on, where they get stupid is when they start telling banks what lending and ALCO practices they must engage in.

They also tend to be cyclical, and highly responsive to whatever the public's hot button du jour happens to be.

For example, there'll be a huge hue and cry about people getting turned down for credit cards. Or their limit is too low. Or some other way the suits aren't helping the little guy. So the Consumer Financial Protection Board (CFPB) makes a requirement that they extend credit cards, with an appropriately large limit, to people who would never have qualified before.

Then, when a disproportionate number of little guys max out their cards and can't pay it back, the banks start to pursue collection efforts. And all of a sudden the suits are money-grubbing carpetbaggers who should be barred from collecting from the poor little guy because....well, because they knew he couldn't pay the money back when they lent it to them.

They're right on that last part. The banks knew when they issued the credit cards that a disproportionate number would go bad. But they were forcibly coerced into doing it.

There's a reason credit card interest rates are what they are. And there are reasons banks don't make much money on credit cards through the business cycle despite the high interest rates. Forced lending to people who can't prove by their financial position and credit history that they are good credit risks is one of them.

I could go on about other CFPB dictates (like forcing caps on or elimination of overdraft fees, or caps on exchange fees), but I don't have time to write on it and you probably won't want to read it.

Then there's the Community Reinvestment Act (CRA) requiring banks to "invest" (read: give money) to "underserved" parts of the community. This is more a commercial lending thing, often financing "urban redevelopment".

It's really Field of Dreams banking -- If you build it, they will come....you hope.

Problem there is that Banking 001 says you need at least two sources of repayment on a loan -- usually (1) the borrower's finances and (2) pledged collateral. Or the borrower is so strong vs. the dollar amount of the loan that you don't need collateral.

CRA loans don't usually have either. As in, the borrower is often a single-asset entity whose sole asset is the one the loan financed. The source of repayment is the success of the project. Thing is, the success of the project also determines the value of the asset. For example, a half-occupied residential development isn't worth near what the same project would be if it were full.

If it doesn't succeed (and they often don't -- "redevelopment" necessarily implies that there is a problem), the collateral isn't worth the loan amount, and the single-asset entity doesn't have any money from any other source to pay.

So the bank takes the hit on a loan that, made under any other circumstances, would be an unsafe and unsound banking practice and grounds for removal of executives.

Which brings me back around to: Regulators are highly valuable in keeping banks from doing stupid stuff -- and left to their own devices, the banks will do stupid stuff.

The problem is that when they start making banks do stupid stuff they lose credibility and provide fuel for people saying we'd be better off without them.

 

[75thru79]

Thanks for this - do you work in the banking industry? I ask because like @4Q Basket Case (whom I know worked in banking) you seem to know a lot about the inner workings of the industy.

Regardless, I appreciate the info - it highlights once again the inefficiencies of the fedgov. I do believe regulation is needed in banking, but having it spread out like that seems highly inefficient.

I used to. I spent 10 years working for one of the national accounting firms, where most of my audit client were banks and then I spent 20 years with a large super-regional bank headquartered in Atlanta.

 

[75thru79]

I'm probably naive, but I've no idea how this would help anyone - even the ultrarich.

The ultrarich probably don't care about deposit insurance because they have so much money it exceeds the insurance limit. Sure, they can spread money around to help alleviate that but it takes time and manpower to keep up with.

Getting rid of the FDIC would mean either 1) abolishing the whole idea of deposit insurance, or 2) shifting that burden to the federal government. There's no way either of those things are happening in today's political climate. Tremendous political risk with very little payoff. I just don't see it happening, nor would I want it to.

 

[UAH]

Apologies in advance for the length. Bank regulation is a complex thing. We need it, but it has a tendency to overreach and explaining both sides takes a while.

I've always thought that the utility of bank regulation is in telling banks what loans they can't make and what asset / liability (ALCO) practices they can't engage in.

This is absolutely necessary. Left to their own devices, the suits will gradually, bit by bit, start financing ever-riskier activity. They end up in a place they could never have imagined themselves, and you get something like the crash of 2008. Or 1985. Or 1974.

The recent problems with Signature Bank and other institutions tied into the tech industry were not caused by loan problems -- their loan portfolios were fine. The problem was that they used their deposits to buy long-term bonds. That's a Banking 001 blunder. Short term liabilities (deposits) financing long-term assets (the bonds).

Compounding that, when interest rates began to rise from historic lows, the value of the long-term bond craters. It's not because the issuer of the bond has any problems paying. It's that the amount they're required to pay (the interest coupon) is below the new market level.

In a situation like that, the value of all bonds issued when rates were really low falls. It's kind of geeky and has to do with exponential arithmetic. But the bottom line is that longer-term bonds get dope-slapped whereas shorter term ones get only a tap on the wrist.

As 75thru79 has commented on, where they get stupid is when they start telling banks what lending and ALCO practices they must engage in.

They also tend to be cyclical, and highly responsive to whatever the public's hot button du jour happens to be.

For example, there'll be a huge hue and cry about people getting turned down for credit cards. Or their limit is too low. Or some other way the suits aren't helping the little guy. So the Consumer Financial Protection Board (CFPB) makes a requirement that they extend credit cards, with an appropriately large limit, to people who would never have qualified before.

Then, when a disproportionate number of little guys max out their cards and can't pay it back, the banks start to pursue collection efforts. And all of a sudden the suits are money-grubbing carpetbaggers who should be barred from collecting from the poor little guy because....well, because they knew he couldn't pay the money back when they lent it to them.

They're right on that last part. The banks knew when they issued the credit cards that a disproportionate number would go bad. But they were forcibly coerced into doing it.

There's a reason credit card interest rates are what they are. And there are reasons banks don't make much money on credit cards through the business cycle despite the high interest rates. Forced lending to people who can't prove by their financial position and credit history that they are good credit risks is one of them.

I could go on about other CFPB dictates (like forcing caps on or elimination of overdraft fees, or caps on exchange fees), but I don't have time to write on it and you probably won't want to read it.

Then there's the Community Reinvestment Act (CRA) requiring banks to "invest" (read: give money) to "underserved" parts of the community. This is more a commercial lending thing, financing "redevelopment".

It's really Field of Dreams banking -- If you build it, they will come....you hope.

Problem there is that Banking 001 says you need at least two sources of repayment on a loan (usually, the borrower's finances and pledged collateral), or the borrower is so strong vs. the dollar amount of the loan that you don't need collateral.

CRA loans don't usually have either. As in, the borrower is often a single-asset entity whose sole asset is the one the loan financed. The source of repayment is the success of the project. The success of the project also determines the value of the asset. For example, a half-occupied residential development isn't worth near what the same project would be if it were full.

If it doesn't succeed (and they often don't -- "redevelopment" necessarily implies that there is a problem), the collateral isn't worth the loan amount, and the single-asset entity doesn't have any money from any other source to pay.

So the bank takes the hit on a loan that, made under any other circumstances, would be an unsafe and unsound banking practice and grounds for removal of executives.

Which brings me back around to: Regulators are highly valuable in keeping banks from doing stupid stuff -- and left to their own devices, they will.

The problem is that when they start making banks do stupid stuff they lose credibility and provide fuel for people saying we'd be better off without them.

An outstanding post. Thank you.

 

[JDCrimson]

We don't realize in the banking industry there are as many dumb people as aggressive people working in banking. There are a bunch of people who don't really grasp asset liability management in the industry, and a bunch of them are regulators. Unfortunately, the regulators only focus on what they understand and thus they focus on form regulations rather than substantive regulations that actually control risk. Crazy ratios that don't really influence ALCO risk, sort like performing surgery with a butter knife.

If Trump tried to eliminate FDIC, it would immediately trigger a liquidity crisis in the banking system, all the older depositors would rush to pull money out, a lot of older people are still, and rightly so, concerned about deposit insurance.

These people arent just trying to drain the swamp they want to blowup society somehow thinking they will profit from the chaos. And none of the people making the decisions were alive when the crises happened that led to the structure we have now. But as Assad and the UH CEO find out that the public has a way in exacting its revenge.

The ultrarich probably don't care about deposit insurance because they have so much money it exceeds the insurance limit. Sure, they can spread money around to help alleviate that but it takes time and manpower to keep up with.

Getting rid of the FDIC would mean either 1) abolishing the whole idea of deposit insurance, or 2) shifting that burden to the federal government. There's no way either of those things are happening in today's political climate. Tremendous political risk with very little payoff. I just don't see it happening, nor would I want it to.