All of Donald Trump’s packaged campaign promises were wrapped in a mostly red, white, and blue ribbon slogan: Make America Great Again.
Since taking office, President Trump has been unwrapping those promises in rapid-fire succession.
Last Friday, as part of his deregulation platform, the president signed an executive order calling for the Treasury Department to review the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, a 2,300-page law that mandated extensive reforms of the financial industry.
Unfortunately, making America great again has nothing to do with making big banks bigger and more dangerous again.
When it comes to financial deregulation, we need to separate fake news about banks being held back from lending from the truth about their power, profits, and potential to sink America again.
The Truth About the Big Banks’ Ability to Lend
After signing the executive order on Feb. 3, 2017, the president met with a group of business executives, including JPMorgan Chase & Co. Chief Executive James Dimon and BlackRock Inc. CEO Laurence Fink.
Here’s what President Trump said at the meeting:
We expect to be cutting a lot out of Dodd-Frank, because frankly, I have so many people, friends of mine, that had nice businesses, they just can’t borrow money. because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank.
While I’m an advocate for smart deregulation and I support the new president, it’s wrong to not call out obviously fake news.
Because here’s the thing – America’s big banks are lending. They’ve all increased their loan books significantly. In fact, according to the U.S. Federal Reserve, the biggest banks have increased core lending 6% annually since 2013. Commercial loans outstanding in 2016 stood at a record $9.1 trillion.
Just last year, JPMorgan grew its loan books by 10%, and Wells Fargo increased loans 5.6%.
“The claim that regulations are prohibiting lending is simply false,” said Anat Admati, a Stanford University finance professor and member of the Federal Deposit Insurance Corp.’s Systemic Resolution Advisory Committee. “The banks have plenty of money and can raise more from investors like other businesses if they have worthy loans to make. If they don’t lend, it’s because they choose not to lend and instead do many other things.”
Here’s What Big Banks Would Rather Be Doing
“Other things” are what cutting Dodd-Frank regulations, including the Volcker Rule, are all about for big banks. They’ve got plenty of money to make loans, they want to free up regulatory capital to trade for themselves like leveraged hedge funds and get back to devising other profit-making schemes, which is what Dodd-Frank stops them from doing.
Banks have mandated levels of capital they have to hold and have reserve requirements that they have to set aside against loans and bets they make.
But banks don’t actually “hold” capital. In banking, capital refers to the funding they receive from shareholders. Every penny of it can be loaned out.
A 5% minimum capital requirement means that 5% of the bank’s liabilities have to be equity, while the rest can be deposits or other borrowing. The more equity a bank has, the smaller its risk of failing when losses pile up.
Here’s what the Federal Reserve’s website says about capital requirements:
Capital regulation is particularly important because deposit insurance and other elements of the federal safety net provide banks with an incentive to increase their leverage beyond what the market – in the absence of depositor protection – would permit. The types and quantity of risk inherent in an institution’s activities will determine the extent to which it may be necessary to maintain capital at levels above required regulatory minimums to properly reflect the potentially adverse consequences that these risks may have on the institution’s capital.
The former president of Goldman Sachs, now the director of the White House’s National Economic Council, Gary Cohn said last week in a Wall Street Journal interview:
Every place a bank needs to hold capital and they need to retain capital prohibits them from lending, so we’re going to attack all aspects of Dodd-Frank… Americans are going to have better choices and Americans are going to have better products because we’re not going to burden the banks with literally hundreds of billions of dollars of regulatory costs every year. Banks are going to be able to price product more efficiently and more effectively to consumers.
During his campaign, Mr. Trump blamed the political establishment and Wall Street banks for leaving behind the majority of Americans, especially the middle class, and vowed to break up both.
Those red, white, and blue populist-packaged promises have already been abandoned as the president fills his cabinet and administration with members of Congress and Wall Street executives, including Mr. Cohn, who retired from Goldman Sachs.
Dear Mr. President…
The executive order doesn’t do much more than call for a review of Dodd-Frank, which the president and his administration don’t have a lot leeway in changing on their own anyway.
But the rhetoric out of the White House is clear.
They’re going to slice and dice regulations where they can, and where they can’t, they’re going to direct the interpretation and enforcement of the ones that go against big bank constituents by putting crony capitalist administrators at the head of agencies charged with overseeing Dodd-Frank rules and regulations and at the Fed.
Asked about potential changes at the Consumer Financial Protection Bureau, a Dodd-Frank mandated agency, Gary Cohn said, “Personnel is policy.” In other words, if you can’t change the rules, change who’s in charge of executing them.
I’m starting now, because it looks like I have to….
I’m calling on the president to fulfill his promises to drain the swamp and take on the big banks.
Please, Mr. President: Make America Great Again by making it safe from greedy big banks while cutting longwinded regulations that don’t say simply, “Do this, don’t do that, or you’re going to jail.”
It’s that simple.