Senator Warren explained that Dodd-Frank mandates the Board of Governors of the Federal Reserve System (“FRB”) to impose stricter rules and apply more careful oversight to banks with more than $50 billion in assets. According to Senator Warren, the FRB has done a good job of “aggressively tailor[ing]” rules to ensure that banks with just over $50 billion in assets are not treated the same as banks with more than $250 billion in assets. This tailoring process is “ongoing,” and includes recent efforts to lower stress-testing requirements for banks with less than $250 billion in assets.
Senator Warren contended that big banks continue to advocate and lobby for raising the $50 billion threshold to $250 billion, or to have it replaced with a “multi-factor test.” She criticized both approaches, arguing that even banks at the lower end of the threshold pose significant risks to the financial system. Senator Warren posited that the correlated nature of these banks’ portfolios could lead to several of them failing at once. Lowering the threshold would only provide “negligible” benefit, she argued. Senator Warren suggested that changing the threshold would lead not to increased lending, but rather to “additional stock buybacks, mergers, and executive bonuses.”
Lofchie Comment: Senator Warren’s arguments might be more compelling if she tried to fit them more closely to particular facts or concerns. Because she chooses to argue in generalities, her claims have the appearance of generic political statements as opposed to attempts to discuss better financial regulation. As a result, the Senator remains consistent in her views on regulation: more is always better.
Given the authority that the Federal Reserve Board has over banks, it is an overstatement to suggest that banks might escape the Fed’s scrutiny. No one is suggesting that the Fed would not regulate bank holding companies. Further, the federal banking regulators have substantial authority over executive compensation and stock buybacks. That authority is not going to disappear. Lastly, it is not clear why Senator Warren believes that some reduction in regulation would lead to an increase in bank mergers. Heavy regulation results in increased fixed costs, which favors the very largest entities. One need not look far for proof. Since the adoption of Dodd-Frank, there has been increased financial industry consolidation (particularly in areas regulated by the CFTC, where the regulatory increases have been greatest; e.g., the number of FCMs is approximately halved).
Perhaps there are good arguments for maintaining the regulations that Senator Warren supports. If that is the case, Senator Warren would do better, to the extent that her interest is regulatory policy, to make those arguments with a good bit more specificity.