Post-crisis banking rules are almost done, but critics aren't happy

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Six years after Wall Street’s collapse, regulators have finished the bulk of the rules meant to prevent banks from failing and requiring bailouts again. But neither the banking industry nor regulatory experts is satisfied with the results.

Wednesday’s vote by regulators to add a new liquidity requirement for banks means that “most of the really big stuff has been or is in the process of being implemented,” said one top banking industry lobbyist.

While only 55 percent of the rules required by the landmark Dodd-Frank financial reform law have been completed, most of the ones regarding standards for banks have been finished, according to the law firm Davis Polk. The big provisions of the Basel III international regulations meant to address the causes of the financial crisis are also done.

In addition to requiring banks to hold more liquid assets in case of a cash crunch, banking regulators have finalized plans to mandate that banks have more capital relative to their risk-weighted assets, and to limit their overall leverage or dependence on loans. All three provisions were required under both Dodd-Frank and Basel III.

The net effect, according to the industry lobbyist, is that “capital and liquidity among banks is twice what it was in 2009 already.”

Although the process has been slow, many of the significant changes took effect before the rules were officially written, said Marcus Stanley, policy director for Americans for Financial Reform. “Certain things happened behind the scenes,” Stanley told the Washington Examiner, including “regulators twisting banks’ arms to improve capital positions. These rules just institutionalize the changes regulators have made banks do behind the scenes.”

Nevertheless, Stanley criticized the rules for not going far enough to make banks safer. “Six years after the financial crisis, ‘too big to fail,’ by the regulators’ own admission, has not been solved,” Stanley said. He added that the number of rules made so far “certainly represents progress, but I don’t think many people would say it represents solving the problems that were present in the financial crisis.”

Wayne Abernathy, an executive vice president at the American Bankers Association, warned that the rules go too far in some cases. “This next year you’re going to see the actual implementation of those rules going into effect,” Abernathy said, and the capital and leverage standards are going to make it harder for small banks “to do their business.”

Abernathy said banks want to “keep the spirit of Basel” and hold high quality of capital. But he criticized the detailed provisions making it impossible for banks to hold certain assets such as mortgage servicing rights — a development that he says hurts customers as well as banks.

Tony Carfang, director of the financial consulting business Treasury Strategies, called the implementation of the banking rules “horrendous.”

“While these regulations aim to somehow limit, or curtail, or punish, or make safer the banking industry, banks are what they call financial intermediaries,” Carfang said. “By definition, they are something through which things flow. Ultimately the consequences of that are borne by the banks’ customers, not the bank. That’s something the entire regulatory process has failed to consider.”

The blame for poor regulation, according to Hester Peirce of the libertarian Mercatus Center, lies with the Dodd-Frank law, not the agencies such as the Federal Reserve and the Federal Deposit Insurance Corp. tasked with writing rules based on the law. “I’m not very happy with where things are, but I think it was inevitable with what Dodd-Frank told the regulators to do,” Peirce said. “That’s the big theme – pulling decisions out of the banks and putting them in the hands of regulators,” Peirce told the Examiner.

Although the specific rules envisioned by Dodd-Frank and Basel III have been written, said Aaron Klein of the Bipartisan Policy Center, there is one more significant rule regarding bank standards that has yet to be written. That is a minimum required amount of long-term, unsecured debt for bank holding companies.

The requirement would aid the FDIC in resolving failing firms. To prevent a situation like the one surrounding Lehman Brothers during the investment bank's spectacular failure in 2008, the FDIC’s new strategy is to take over any collapsing bank at the holding company level. That method is intended to reduce confusion over the fate of the bank’s subsidiaries.

“In that process, the holding company would be put into failure and the long-term debt would be used to recapitalize the entity,” explained Klein, but to do that, a minimum level of long-term debt is required.

The long-term debt requirement would form a “three-legged stool” with the other major banking regulations, Klein said. “You have the capital requirements, you have the liquidity requirements, and you have the debt [requirement], and those three kind of work together.”

The Fed is expected to announce long-term debt requirements in the fall.

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