FDIC Chair Martin J. Gruenberg asserted that despite the challenging economic environment for U.S. banks, relevant data suggests that post-crisis reforms have made the financial system more resilient and stable while strengthening the ability of banking organizations to serve the U.S. economy. Mr. Gruenberg discussed four broad areas that reflect the ability of banking organizations to serve the U.S. economy effectively:
Mr. Gruenberg argued that despite post-crises reform, U.S. banks remain willing to lend. He noted growth in the mortgage and commercial loan sectors, stronger capital and better and more resilient lending practices.
Mr. Gruenberg emphasized that “despite significant headwinds” – particularly reductions in net interest margin – bank earnings have demonstrated a favorable trajectory generally. He asserted that this improvement reflects a return to profitable banking, but with improved capital levels that are better equipped to absorb losses compared to the levels in pre-crisis years.
Mr. Gruenberg stated that post-crisis market liquidity for bonds has improved according to “recent research.” He emphasized that:
- effective prudential regulation should help promote sustainable liquidity conditions through time;
- the reduction in the size of broker-dealer balance sheets in recent years might be the result of factors such as (i) the consolidated capital and liquidity of their parent banking organizations, (ii) the effective elimination of their access to intra-day credit from the clearing banks in the tri-party repo market, (iii) the risks of holding bonds, and (iv) lower bid-offer spreads, which make buying and selling bonds less profitable; and
- “market-making” may not be retreating, but instead may be changing through “lower transaction costs, more frequent and smaller trades, and more trades conducted as agent or on order rather than as principal.”
Migration of Financial Activities to Nonbanks
Mr. Gruenberg expressed “the idea that the post-crisis reforms may be changing the distribution of financial activity between banks and nonbanks, in some way making banks less important financial players than before.”
Mr. Gruenberg delivered his remarks before the Exchequer Club.
Lofchie Comment: For other apparent “good news” from FDIC Chair Gruenberg, see, e.g., FDIC Chair Gruenberg Says Financial Industry Better Prepared to Address Economic Challenges; Regulators Tout Progress in Bank Regulation; FDIC Chair Cites Progress in Development of Orderly Liquidation Framework.
Mr. Gruenberg states accurately that some measures of liquidity have in fact steadied or improved. He is, no doubt, aware that some measures of liquidity look materially worse. The question of which measures of liquidity are “better” might be the subject of some debate, but what should not be debated is the reality that the numbers are mixed. Anyone who is interested in a more balanced discussion of issues such as liquidity might wish to consider this report, which presents an alternative view even though it was produced by a governmental entity: IOSCO Staff Report Examines Potential Risks and Key Trends in Global Financial Markets.
The more serious issue to consider is this: nearly all regulation, even good regulation, is a double-edged sword. Even if the thrust of the net effect is good, the back-slash of increased regulation can impose costs and may prevent even more transactions. Devising economic regulations should be like determining speed limits: good regulators should weigh the benefits of road safety against the cost of taking too long to get home. There is no perfect speed, nor is there any speed with benefits and no costs. Ideally, regulators should pay constant attention to this cost/benefit balance; ideally, they should elucidate this balancing process for regulated persons and observers. Any message that leaves the impression that regulation is all good all the time will leave the regulated feeling doubtful as they pedal their way to profit.