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Has Congress Forgotten What Happened in 2008?

After witnessing the devastating impact the Great Recession had on the American economy, and the reckless banking practices that served as the root of such national misery, both conservative and liberal policymakers agreed that the banking industry needed more stringent oversight. So, in 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, a law that, among other things, imposed strict rules on the banking industry, specifically financial institutions with over $50 billion in consolidated assets. Going forward, these Systemically Important Financial Institutions (SIFIs) would be required to undergo annual stress tests where they, in conjunction with their regulator, simulate how an orderly liquidation of assets would transpire if the firm were thrust into bankruptcy.

Over time these tests have shown to be extremely useful for regulators in determining which firms have adequately prepared for economic downturns versus those which have become dangerously over-leveraged and are in need of restructuring. But for some reason Congress seems to have dismissed the effectiveness of these tests, and forgotten the millions of Americans that, still to this day, are recovering from the reckless lending practices many banks pursued in the years and months leading to 2008.

Why do I say this?

Because over the last two weeks, Congress passed and President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act — new banking legislation which, at its core, eases lending restrictions on small and medium size banks and decreases regulatory oversight of most large financial institutions. This egregiously shortsighted law chips away at the safety provisions of Dodd-Frank and implements three policies that this author believes are highly dangerous to the long-term health of the American economy. First, it increases the SIFI asset threshold from $50 billion to $100 billion and outlines plans to further increase said threshold to $250 billion after 18 months—leaving only a handful of banks subject to the highest level of scrutiny and making the banking industry far more prone to crisis. Second, and equally disconcerting, is what can now be classified as tier 2 capital when determining whether a firm's outstanding leverage remains in accordance with Basel III. For example, Dodd Frank stipulates that municipal debt cannot qualify as tier 2 capital because municipal debt markets are often illiquid, with some securities going days without a single trade. However, the new law ignores this reality and removes the municipal debt restriction, as long as the security in question is investment grade—a risky notion when considering many of the securities that went bust during the financial crisis were rated AAA, the safest security designation and well above the required BBB for investment grade. Third, the bill rescinds the Volker Rule for community banks and includes language making it much easier for these banks to originate loans—letting financial firms, with less than $10 billion in consolidated assets, lend to the riskiest profile of borrowers while simultaneously engaging in proprietary trading with their client's deposits.

So, let’s just call this law what it really is: a gift to bankers at the taxpayer's expense. The law does nothing to make lending practices fairer for borrowers; does nothing to make the economy healthier in the long-term; and does nothing to reign in the predatory lending practices that are still pervasive within the banking industry. Yes, there will be an uptick in bank profits as originations increase, and looser regulation may even provide a slight boost economic growth. But, Congress’s increasingly myopic view that "what's good for bankers is good for the American economy” will only further increase individual indebtedness while at the same time incentivizing banks to revert to the “originate and flip” practices that were fundamental in precipitating the economic Armageddon of 2008.

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