| As Washington pursues an agenda of deregulation, community banks watch and wait for something that will actually benefit their portfolios.
The rollback of the DFAST requirement last month may have some banks celebrating, but it came too late for most. As Bram Berkowitz reports this week, the two banks in Massachusetts that would have had to complete the stress test have already laid the groundwork for compliance and at this time have no plans to reduce their infrastructure.
Fortunately the bankers of Massachusetts recognize that a robust and diverse risk management process is not a bad thing. (Possibly they’re just pragmatic – after all, they’ve already spent the money.)
Last week news broke that regulators propose to loosen the restrictions of the Volcker Rule, a major component of the Dodd-Frank Act.
The Volcker Rule was the brainchild of Paul Volcker, a former Fed chairman. Last week Volcker said in a statement that “what is critical is that simplification not undermine the core principle at stake – that taxpayer-supported banking groups, of any size, not participate in proprietary trading at odds with the basic public and customers’ interests.”
Fortunately for banks, easing of the Volcker Rule, DFAST and whatever else Washington dreams up in the coming months may actually make their lives easier. Unfortunately for consumers, protecting the public does not seem to be a priority in today’s political climate.
But even more fortunately for the people of Massachusetts is that while the bankers in our fair commonwealth do indeed want to make money, they don’t want to do it in ways that risk their assets, or their customers’ assets.
Intended to curb the risky activities of banks that contributed to a world-wide financial crisis, Dodd-Frank’s goals were honorable, but it is a messy piece of legislation that imposed onerous compliance requirements on banks nationwide. Those burdens have led to tighter margins and increased M&A activity.
Dodd-Frank was reactionary and punitive, but more importantly, it was never going to actually work. Having crashed the worldwide economy once, Wall Street was unlikely to continue to engage in those specific activities. Without a doubt the markets are currently engaging in practices that have the potential to cause another recession – but no one, probably not even Wall Street, knows what those practices are. We learn from our mistakes, but then make new ones.
The real danger in regulatory repeal lies not in the risks that an unfettered Wall Street will take – rest assured, it has already found new dangerous endeavors – it lies in a marketplace that can be changed on a whim by a united executive and legislative branch. The two are supposed to balance each other, not add two-thirds of the government’s combined weight to a scale.
Overregulation is bad for business, it’s true, but so is uncertainty. Dodd-Frank was passed under President Obama and, it appears, will be substantially repealed under President Trump. What will be passed or repealed under the unknown president in 2020 or 2024?
This cycle of overregulation and underregulation is dangerous for the markets, for the banks and for the American people.
