Ed's Blog

Have Banker Deregulation Demands Jumped the Shark?

By Ed Mierzwinski
Senior Director, Federal Consumer Program

When a tired TV show desperate for viewers goes over the top with wacky plots, it is said to have "jumped the shark," as when Fonzie of Happy Days jumped a shark while water-skiing. It didn't work and the show faded. Unfortunately, even after the Wells Fargo debacle and even as bank profits return to record levels after the 2008 financial collapse, it hasn't happened with bank deregulation "viewers." Members of Congress viewing bank demands continue to show an unslaked appetite for granting them -- even the most over-the-top, outrageous proposals to take consumer and financial system safety cops off the bank beat. Meanwhile, the public -- by wide, non-partisan margins -- wants to keep the cops on the beat.

Late last year, the Senate Banking Committee approved S2155, a sweeping bi-partisan proposal to broadly deregulate housing and safety and soundness rules. On Wednesday, the House Financial Services Committee, signaling that House approval last year of the so-called Financial Choice Act just wasn't enough deregulation, will bring to a vote its latest package of nearly two dozen proposals that threaten consumers, homeowners, small investors and taxpayers. Meanwhile, of course, the administration also pushes forward with regulatory rollbacks.

The House package centerpiece is a bill that brazenly and completely jumps the shark. The so-called Community Financial Institution Exemption Act, HR1264, was introduced by Roger Williams (TX) and has 29 co-sponsors. It states that nearly all banks (99% of them) and credit unions (all but 1 of them) -- any with less than $50 billion in total assets -- would not need to comply with any new or modified rule of the Consumer Financial Protection Bureau. Currently, all banks and other financial firms must comply with Consumer Bureau rules; however, the bureau has and often uses its current authority to "tailor" or modify rules for actual community institutions, generally smaller or rural institutions under $1-$2 billion in assets. 

The proposed bill would also apply to changes to any existing rule under some 19 inherited "enumerated statutes," such as the 1968 Truth In Lending Act. It provides a tortured process for reinstating a rule for any class of institution, subject to the approval of the prudential regulators.

In his testimony as the only consumer witness at a token hearing on HR1264 and other proposals before the committee, Scott Astrada of the Center for Responsible Lending recently pointed out the following: 

"The proposed legislation must be considered in the context of the current financial marketplace and the market failures that significantly contributed to the Great Recession. The Great Recession of 2008 has already shown us the consequences of a lack of basic protections and oversight in the financial marketplace. [...] According to the Federal Deposit Insurance Corporation (FDIC), more than 500 banks failed and closed their doors, most of these institutions were community banks. The devastation caused by the crash soon spread to the national economy, which plunged into a severe recession. People lost their jobs, small businesses went under, and many Americans—from small entrepreneurs to families—struggled to make ends meet while being unable to obtain the credit and capital they needed from financial institutions." 

Yet, as Mr. Astrada goes on to point out, banks, including actual small community banks, have returned to stunning profitability under the fair rules of the financial road established by the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act. 

"Small banks are playing a central role in the recovery. Contrary to theories that Dodd-Frank has stifled growth, the financial sector has had record profits. In 2016, U.S. financial institutions had total annual profits of $171.3 billion, the highest level since 2013. In the second quarter of 2017 FDIC-insured institutions reported aggregate net income of $48.3 billion, up $4.7 billion (10.7 percent) from a year earlier. Community bank profitability has also rebounded strongly and meets pre-recession levels. In 2010, less than 78 percent of community banks were profitable. By the end of 2015, over 95 percent of community banks were profitable. A FDIC report from 2016 third quarter notes that the percentage of unprofitable community banks sunk to 4.6 percent, which is the “lowest percentage since the third quarter of 1997.”"

But, despite that massive return to bank profitability, banks and their viewers on Capitol Hill and in the administration continue to risk the health of the financial system and economy by demanding even more unsubstantiated and uncalled for rollbacks of consumer and safety and soundness protections. In addition to Congress, the current administration is no friend of the consumer, consumer protection or the Consumer Bureau. As Lisa Donner, director of the PIRG-backed coalition Americans for Financial Reform, recently pointed out in a column opposing S2155: "Banks are not charity cases." She continues, after also citing record bank earnings:

"Ordinary American families saw no such increase in their earnings this year. But they’re taking one on the chin at the other end of Pennsylvania Ave. as the Trump administration attempts to hamstring the Consumer Financial Protection Bureau by trying to install someone as director [OMB chief Mick Mulvaney] who has said it should not exist. The work they are trying to disrupt? This agency, only 6 years old, has won $12 billion in relief for over 29 million American consumers. These attacks are all the more reason for Congress to be focused on the public interest and consumer protection."

Instead, some in Congress persist in demanding more and more favors for banks, even as their demands grow more and more outrageous. The banks have truly jumped the shark, but so far, their Congressional viewers are still watching and listening, even as the public, on a broadly bi-partisan basis, strongly supports continued effective financial regulation.

Neither HR1264, the Financial Choice Act or S2155, nor the actions of the administration, represent well-thought out or carefully calibrated or "tailored" course corrections. The over-the-top bills and administrative actions are examples of a legislative and regulatory system that is too heavily influenced by a still-powerful financial industry. Whether Washington has forgotten the lessons of 2008, or chooses to ignore them, the result is the same. Consumers, communities and the financial system will have fewer protections if the banks have their way.

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