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Post-crisis bank rules survive attacks; consumer protections at risk
WASHINGTON, Sept 9, 2018 (BSS/AFP) – Tougher US bank regulations designed
to prevent another crippling financial meltdown have survived threats to
undermine and weaken them — but the consumer protections that were a key
feature remain at risk.
One of the architects of the post-crisis regulations says President Donald
Trump’s regulators have been “wrecking” the agency designed to shield
consumers from some of the deceptive practices that helped precipitate the
2008 financial crisis.
Those practices included offering products such as interest-only home
loans that forced monthly payments to explode in the later years, which the
borrower could not afford.
Trump has repeatedly pledged to make cutting regulations a central goal of
his presidency and he has support from Republicans in Congress who had been
working to dilute the tougher rules on banks.
However, retired Massachusetts legislator Barney Frank, one of the driving
forces behind the Dodd-Frank banking reform bill, told AFP he was satisfied
his namesake legislation had survived and would continue to flash warning
lights if banks get into risky situations. That will ensure the government is
not again forced to use taxpayer funds to bail out a financial institution.
– Rolling back regulation –
Still he remains concerned about what Trump’s regulators are doing to the
Consumer Financial Protection Bureau (CFPB), created by Dodd-Frank, because
“the right wing hates this notion that the government has to protect people
from the private sector.”
“It is very clear that well over 95 percent of that bill in terms of its
importance is now rock solid,” Frank said in an interview, referring to the
reform Congress passed this summer.
The only area where there has been serious damage has been from Mick
Mulvaney, Trump’s interim choice to lead the CFPB, a frequent critic of the
agency’s very existence, let alone its aggressive enforcement, he said.
Mulvaney has said the bureau “is far too powerful,” and has taken steps to
curb that power: he imposed a hiring freeze and a review of litigation.
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New cases have come to a halt since he took over, according to reports,
and officials have reversed or weakened scrutiny of auto loans — one of the
fastest growing types of debt nationwide — payday lenders, and data to track
racial discrimination in home mortgage lending.
“I regret that but that’s not a stability issue,” Frank said. And the
agency has not been changed through legislation and could be restored by a
future administration.
Aaron Klein, an expert on regulations at the Brookings Institution, said,
“The biggest change to Dodd-Frank has been the change from Obama-era
regulators to Trump-era regulators.”
“That change dwarfs any legal changes that have occurred to the act, by
orders of magnitude,” he told AFP, noting that Mulvaney, a White House budget
official, had “deeply politicized” the agency, weakening its role as “an
active police force” that guards against misconduct by financial services
providers.
And while he agreed a global crisis was unlikely to result from lax
consumer protections, “I’m not comfortable with the idea of million of
Americans getting ripped off in basic financial services because a regulator
in Washington doesn’t want to do his job.”
– Banking rules eased –
Despite some changes, the main pillars of the law requiring increased
scrutiny of banks, especially large banks, survived and should ensure the
financial system will not be as vulnerable to a crisis, certainly not a
crisis created by an explosion of opaque financial products at the heart of
the one a decade ago.
And the legislation ensures regulators have the flexibility to take steps
to curb new potential threats when they arise. They already have used that
new authority against some cryptocurrency investment schemes.
“It’s true the Trump people are talking about being less rigorous with the
regulations,” Frank said. But “every one of those rules is going to remain in
place,” and if their optimism that the private sector has learned its lessons
proves to be wrong “all the levers are there to stop it long before it
reaches crisis.”
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“I feel gratified that our work has held up,” politically and
economically, he said.
Congress did ease scrutiny of smaller banks — defined as those with less
than $100 billion in assets — while those with over $250 billion have the
toughest oversight, and regulators are allowed discretion with those that
fall in between.
The largest banks now must have a “living will” that maps out how the bank
would be dissolved if it were faced with a catastrophic crisis, one that
would not involve a government rescue.
And they are subject to “stress tests” by the Federal Reserve to see how
they would perform in certain crisis conditions, and their activities can be
curtailed if they fail.
Particular focus is on financial instruments that exploded in the years
leading up to the crisis, which packaged home mortgages — particularly to
less creditworthy borrowers — into securities that were sold off, passing
the risk along to investors.
But Klein cautioned that a crisis rarely strikes twice in the same place.
“So I don’t know which will cause the next crisis, but I’m fairly sure
it’s not Dutch tulips…and not subprime mortgages.”
“What I am concerned about is a relaxation of the mindset that got us into
this crisis, which is the toleration or the ignoring of risky actions because
they’re generating a lot of short-term profit.”
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