Open thread March 14, 2023

They warned in 2018 that weakening regulations could lead to failure like SVB. Now Elizabeth Warren and other Democrats want those changes back.

Boston Globe – March 13

On Monday, a day after federal regulators stepped in to stem a potential crisis triggered by two sudden bank failures, Senator Elizabeth Warren was seething. After all, she had warned five years ago that this was coming.

“What just happened is the direct result of the change in the laws in 2018 that weakened oversight and invited bank CEOs to take on more risk,” Warren said. “They took on that risk, they boosted their profits and they’ve blown up a couple of banks so far.”

A decade after the 2008 financial crisis, then-President Trump and congressional Republicans pushed to loosen regulations on midsized banks in response to complaints from industry lobbyists. Warren and many Democrats said it was a bad idea. 

“This bill will increase the likelihood that American taxpayers will be on the hook for another bailout,” the Massachusetts Democrat said at the time.

But a bipartisan coalition voted to ease some of the tough reforms of the 2010 Dodd-Frank law that were put in place to prevent future bank failures. Among the provisions was one that raised the threshold for banks to undergo strict federal oversight, from $50 billion to $250 billion, a change aimed at helping institutions like Silicon Valley Bank and Signature Bank. 

Republicans, who just last week were urging even looser bank rules, are unlikely to go along. But some oversight still could be increased by banking regulators at the Federal Reserve with discretion granted under the 2018 law.

Daniel Tarullo, a former Fed governor who led its effort to enact the Dodd-Frank reforms, expects that’s what the central bank’s regulators will do once they get past this problem.

“Do they need changes in regulation? Or is it really just a handful of banks, and then they can have a set of supervisory thresholds that get them to look more closely” at those institutions, said Tarullo, who left the Fed in 2017 and now is a Harvard Law School professor. “I don’t know the answer to that, and I don’t know whether they know the answer to it now, but they certainly are able to get that answer.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress to prevent the extreme risk-taking by banks that led to widespread losses when the housing market collapsed in 2007 and almost caused a financial meltdown. Congress provided $700 billion to bail out the banks and wanted to avoid having to ever do that again.

The reforms included rigorous annual stress tests for banks with more than $50 billion in assets to make sure they could withstand negative shocks. But it just took a few years before banks began chafing at the new rules. Trump’s vow to eliminate regulations, paired with a broad, bipartisan consensus that small community banks should get some relief because their failure would not endanger the entire financial system, opened the door to a limited rollback. But lawmakers were divided on how far the relief should go for larger banks. 

… Warren said the weakened regulatory oversight made it more difficult for regulators to spot risky bank activity that could lead to a failure. That was the same systemic flaw that led to the 2008 financial crisis and that Dodd-Frank was intended to fix. 

Warren said she will introduce legislation to reverse those 2018 changes as well push Fed officials to toughen the banking oversight using their own authority.

But passing such legislation is unlikely with the House under Republican control. And early this month, 10 Republicans on the Senate Banking Committee wrote to Fed chair Jerome Powell to say they were worried a Fed review that predated the bank failures could lead to requirements for institutions to hold more capital reserves to protect against losses.

They cited the 2018 changes they said were designed “to address the overly broad and overly prescriptive implementation” of the Dodd-Frank reforms and could “have a chilling effect” on the availability of financial services.

Warren said they’ve got it wrong again.

“When Congress intervenes to keep the regulators strong, then the banking system stays strong. But when Congress loosens up, the banking system itself starts taking on more risks,” she said. “Banking should be boring. That was the lesson we should have learned coming out of 2008. And it’s a lesson we need to relearn in 2023.”

Call this ‘Why Trump Wins the GOP Nom Next Year’.

M.I.A. in 2024: The Republicans Trump Vanquished in 2016

NY Times – March 14

… For months, Mr. DeSantis has been the lone Republican who is competitive with Mr. Trump in polls. He has drawn public praise from a flotilla of prominent Republicans eager to move on from Mr. Trump but conscious of how he has transformed the party.

(Jeb) Bush, a fellow Floridian who as the early front-runner in 2016 drew the harshest attacks from Mr. Trump, emerged last month to heap praise on Mr. DeSantis. …

Mr. DeSantis, former Gov. Nikki Haley of South Carolina and several other Republicans are angling to topple Mr. Trump, but the expected field will probably fit easily on one debate stage.  …

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But Trump still loses to Biden.

What the Dems have going for them is that if only Arizona & Georgia go back to voting strictly for GOP candidates, Biden will still win a majority of electoral votes: 279 to 259.