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FDIC Proposals Help Banks, Not Main Street

The last few weeks were busy ones for the FDIC which proposed or instituted numerous rules that overall favored the financial industry over Main Street families. 

In early July, the FDIC proposed a rule that will spur attempts by large commercial enterprises to own and control industrial banks.

The FDIC claims that this proposal of conditions is merely codifying the FDIC's current approach to the supervision of industrial banks and their parent companies. Yet, it would in fact “facilitate the acquisition of industrial banks by both financial firms and nonfinancial commercial enterprises, which would threaten the stability of the financial system, says Steve Hall, Legal Director and Securities Specialist for Better Markets.

“The FDIC is proposing to revive, without basis, a very dangerous loophole that allows industrial companies to own banks but avoid financial rules that protect depositors, the financial system and the economy,” Hall says. “If this proposal is finalized, more and more huge commercial firms will seek to establish a banking arm by acquiring an industrial bank. That means a greater risk of bank instability, more claims on the deposit insurance fund established to protect customers’ bank balances, and ever-larger concentrations of wealth and economic power that hurt competition and consumers. That’s why we strongly opposed the proposal in this comment letter.”

Better Markets also hit back against other dangerous FDIC proposals, including:

Volcker Rule Covered Funds Provisions—Five agencies opened new avenues for U.S. banks to make speculative investments in certain types of private funds in a final rule to amend the Volcker Rule’s covered funds provisions. This move comes as part of a years-long assault on the safeguards that work to stop reckless get-rich-quick thinking on Wall Street from causing another catastrophic financial meltdown. Better Markets’ Joe Cisewski says the new covered funds ‘exclusions’ “have set the stage to turn the Volcker rule into the regulatory equivalent of a Potemkin village.  The rule remains in theory. In practice, however, multiple new exclusions and expanded existing exclusions will place far too many of the speculative activities of U.S.-taxpayer-backed banks beyond the reach of the Volcker rule.”

Better Markets has been engaged in a lengthy fight against such efforts to weaken the Volcker Rule. Read more in this comment letter and press release about our efforts.

Inter-Affiliate Margin Elimination—In late June, the FDIC and four other prudential regulators  voted to eliminate initial margin requirements on inter-affiliate swaps. While the technical details of this move are complicated, the result is clear: at least a $40 billion giveaway to the largest banks and financial institutions that will allow foreign swap dealers to shift risk into the U.S. and ultimately leave the American taxpayer footing the bill when the next crash comes.

“Adding insult to injury, this is an egregious, intentional and knowing lawless action by regulators sworn to uphold the law and to protect depositors,” says Better Markets Joe Cisewski. “The Dodd-Frank Act mandated ‘both initial and variation margin requirements’ on ‘all’ uncleared swaps and security-based swaps. The bank regulators therefore do not have the legal authority to eliminate initial margin requirements on inter-affiliate derivatives, which is presumably why they neither cited to nor relied upon any valid authorities when they proposed the expansive loophole last year.”

State Consumer Protection Laws Knocked Out—The FDIC released its final rule aimed at overriding state consumer protection laws in late June. Tim Clark, Distinguished Senior Banking Adviser for Better Markets, says the new rule “paves the way for loan sharks, payday lenders and debt collectors to gouge consumers with sky-high interest rates.”

“The FDIC has now delivered the second blow in a one-two punch aimed at knocking out state laws put in place to protect borrowers from predatory lenders that charge shamefully high interest rates and fees,” Clark says. “As we argued in our comment letter, the rule is not just bad policy that will expose millions of consumers to gouging, sky-high interest rates, it’s also bad rulemaking.”

The FDIC rule comes on the heels of a similar rule released by the OCC. The end result is that nonbanks will have more leeway to side-step state usury prohibitions and wring every last dollar from borrowers by partnering with federally regulated banks.

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