The $50 billion threshold for stricter oversight should stay in place.
Community banks and credit unions face a lot of challenges today, and they make a good case for lightening some unnecessary regulatory burdens. But instead of focusing on these smaller institutions, Congress is considering easing up oversight for some of the biggest banks in the country. This would increase the risk of another financial crisis.
In the aftermath of the crisis, Congress determined that banks with more than $50 billion in assets -- roughly the 40 biggest in the country -- posed an outsized risk to the economy. The 2010 Dodd-Frank Act directed the Federal Reserve to apply stricter oversight and regulation to such institutions. The law was carefully drawn to force the Fed to impose tougher capital, liquidity, and leverage requirements, while it also empowered the central bank to make adjustments based on a bank's size and complexity.
The Fed has done a good job implementing this mandate. It has imposed tougher standards overall, but it has aggressively tailored them so that banks with just over $50 billion in assets are subject to much more lenient rules than banks with more than $250 billion in assets, which in turn face less stringent rules than the handful of biggest banks in the country. This tailoring process is ongoing: The Fed recently announced that it would significantly lower stress-testing requirements for banks with less than $250 billion in assets.
But big banks want more. Their lobbyists have spent years urging Congress to either raise the $50 billion threshold to $250 billion or beyond, or replace it with a convoluted multi-factor test.
Both approaches are dangerous to the economy because they substantially reduce oversight of the biggest and riskiest banks. While lobbyists are pushing the idea that institutions with as much as $500 billion in assets pose no real threat to the economy, experts strongly disagree. At a Senate hearing in 2015, Simon Johnson -- a finance professor at MIT and the former chief economist of the International Monetary Fund -- noted that banks with as little as $50 billion in assets present an enormous risk because they tend to have "highly correlated portfolios." In a time of distress, several banks of this size could fail simultaneously, precipitating "a full-blown financial crisis."
This is not merely a theoretical concern. Taxpayers have already paid dearly for insufficient oversight of banks of this size. During the 2008 financial crisis, taxpayers spent nearly $70 billion bailing out institutions that currently have between $50 billion and $500 billion in assets.
The proposal to replace the $50 billion threshold with a multi-factor test is no better because it relies on the Fed to proactively identify institutions that could pose economic risks. As Johnson testified in 2015, the Fed "clearly" had "a responsibility before the crisis" to do exactly that -- and failed miserably. The central bank lacked the resources to do this kind of intensive study of dozens of financial institutions, and, perhaps more importantly, faced relentless lobbying from big banks intent on avoiding additional oversight. Those same problems exist today.
The risks of the proposed rollback are clear. Meanwhile, the benefits to consumers and the economy are negligible. Lobbyists claim these tougher rules are limiting consumer and small business lending, but the data tell a different story. Even with the additional oversight provided by the current rules, consumer lending is at historically high levels. Fed Chair Janet Yellen testified earlier this year that total commercial and industrial loans outstanding "have grown over 75 percent" since the end of 2010. Lending of all kinds is robust.
The likely motivation behind the effort to change the $50 billion threshold is not additional lending, but additional stock buybacks, mergers and executive bonuses. Historical evidence suggests that if Congress scrapped these vital rules, any reduced costs would translate to larger stock buybacks rather than new loans. Scrapping the rules would also likely lead to a flurry of mergers, producing increased concentration in the banking industry and tilting the playing field even further against community banks and credit unions.
Before 2008, Congress weakened financial oversight and promoted short-term bank profits at the expense of the safety of the financial system. Those decisions helped trigger a crisis that cost millions of families their homes, their jobs and their savings. We shouldn't make that mistake again. The $50 billion threshold is working and it shouldn't be touched.