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Financial Reform Newsletter: Higher Equity Capital Does Not Hurt Lending on Wall Street, But High Bank Payouts Do & More

Higher Equity Capital Does Not Hurt Lending on Wall Street, But High Bank Payouts Do

Rarely has Wall Street’s favorite myth -- that higher equity capital requirements have stifled lending at the biggest banks -- been dealt such a punishing blow as FDIC Vice Chair Thomas Hoenig delivered in a recent letter to Senate Banking Committee Chair Mike Crapo (R-ID) and Ranking Member  and Sherrod Brown (D-OH).  Coming on top of Morris Goldstein’s latest book (Banking’s Final Exam) demolishing these baseless self-serving claims, it’s a mystery why anyone at all listens to Wall Street’s biggest banks when they complain about capital.

The letter, as Hoenig wrote, was sent “…to provide an alternative perspective to recent industry statements claiming that large banks have too much capital and that their improving capital position has resulted in too little lending and a constrained economy.”  He delivers one takedown after another, totally dismantling the claim that financial protection rules have hurt lending, and instead identifies the real culprit: ridiculously high bank payouts:

  • The largest, most complex and systemically important banks, Hoenig says “…are less well capitalized than all the other smaller banks in the U.S.  This is clearly not the type of strength necessary to optimize the largest banks’ support of the American economy, and it should not be satisfactory to taxpayers who continue to remain on stand-by to bail them out.”
  • Moreover, “…despite rhetoric to the contrary, capital is not ’idle’ and it does not ’inhibit’ lending. In fact, capital is a fundamental and permanent source of funding that supports lending.... if, for example, the 10 largest U.S. Bank Holding Companies were to retain a greater share of their earnings earmarked for dividends and share buybacks in 2017 they would be able to increase loans by more than $1 trillion…” [emphasis added.]
  • Share buybacks by the 10 largest by BHCs totaling $83 billion, Hoenig goes on to say, could under current capital rules increase lending to small businesses by $750 billion or mortgage loans by almost $1.5 trillion.

The message is simple: High payouts by Wall Street’s biggest banks are hurting lending; capital requirements make banks stronger, protect taxpayers and enable greater lending throughout the business cycle. 

Another familiar Wall Street complaint was also recently demolished (again): the baseless claims that the Dodd-Frank law and the financial protection rules are hurting bank profitability.  In fact, as Bloomberg reported, “U.S. MegaBanks Are This Close to Breaking Their [All-Time] Profit Record.”  The ten biggest banks in the U.S. “together made $30 billion in the last quarter, just a few hundred million short of the record set in the second quarter of 2007” and, “[e]ven looking at the past 12 months, profits are still near the same level as 2007.”

If Wall Street’s biggest banks put as much effort into lending to Main Street as they do into lobbying and fighting the rules, they’d make more money, the economy would grow, jobs would be created, taxpayers would be protected and the entire financial system would be better for it.  Be great for the country if they gave it a try.


Fighting for You and a Safe and Secure Retirement for All Americans

You work hard.  You play by the rules. You pay your bills.  You take care of your kids and, often, your parents and neighbors.  You try to save a little for emergencies and, if there’s anything left over, for retirement.  That’s why anyone giving you advice on your retirement savings should be required to put your best interests first.  After all, it’s your hard-earned money.

Unfortunately, some of the most wealthy, powerful and politically connected forces in the country are trying to make sure their interests get put ahead of your best interests.  Regrettably, President Trump, his Labor Secretary and his Labor Department are now on their side.  But Better Markets and a broad coalition of allies (including virtually every single consumer and investor protection group in the country) are on the front lines fighting back, fighting for your best interests to be put first.

The years’ long battle to protect American worker’s and retirees’ savings entered a new phase this week as Better Markets filed a comment letter responding to the Department of Labor’s Request for Information seeking “input” on the “best interest” fiduciary duty rule.  Based on what the Trump administration and its Labor Department has been doing, this is just the latest industry-supported attempt to kill, gut or weaken the rule.

Better Markets continues to oppose any delay in the implementation rule and stated in the letter that any further delays or revisions that weaken the rule will be subject to potential legal challenge as arbitrary and capricious.   We also detailed the following:


  • Any further delay in the full implementation of the rule will inflict significant harm, costing millions of retirement savers billions of dollars;
  • The DOL conducted an extraordinarily thorough rulemaking process, adopting many suggestions from industry, resulting in a strong but workable rule that warrants no revisions;
  • The major concerns in President Trump’s Executive Memorandum that are now being considered by DOL have no basis in reality: the Rule will not restrict access to advice or products, disrupt the industry to the detriment of investors, or increase litigation risk to the point of forcing increases in the price of advice;
  • Ample time was provided to industry to adapt to the rule, and they have additional time because other provisions do not take effect until January 1, 2018; and,
  • As it re-evaluates the Rule, the DOL must provide the public and all stakeholders with the same ample opportunity to offer comments as was afforded during the original rulemaking, and it must abide by all the procedural and substantive legal requirements that prohibit rule changes that are arbitrary or capricious.


Finally, much has been said regarding the Securities and Exchange Commission’s (SEC) announcement that they too are considering a fiduciary rule.  Better Markets also addressed this point, explaining that the Rule must not be linked to any standards that the SEC might someday adopt.  As we have spelled out, the DOL and the SEC operate under different statutes with different standards and different purposes.  Moreover, the SEC has no legal authority to issue rules applying to non-securities investments like insurance products, which are common retirement savings products. 

Additionally, the SEC is unlikely to take meaningful steps toward issuing a strong “best interests” rule for years to come.  The SEC has already had ample opportunity to work on this issue, but has done nothing—even though Congress gave it authority to write a fiduciary rule for broker-dealers and even though its own staff recommended the agency move forward years ago.

Rebutting baseless arguments and providing a substantive counterweight to Wall Street, Better Markets continues to fight for your best interests in saving for retirement and in all of your other financial activities.


Better Markets on Trump’s Mindless 2-for-1 Executive Order: “ill-conceived and plainly illegal”
In its first six months, the new Administration has issued a wave of executive orders and memoranda aimed at deregulating our financial markets, getting rid of financial protection rules and weakening consumer and investor rights.  This has made Wall Street cheer, which is why the stock of Wall Street’s biggest banks have jumped.  Investors, consumers and taxpayers, however, have lots of reasons to worry.  These changes aren’t likely to be very good for them.

One of the most far-reaching executive orders requires every executive branch agency to repeal two rules for every new rule it issues and to entirely offset the cost of the new rule—all without considering the benefits promised by the new rule or the benefits lost from repeal of existing rules.  While the Order doesn’t expressly cover the independent financial regulators, it strongly encourages their compliance and thus threatens to erode financial rules that are essential to protect our financial markets from fraud, recklessness, and crisis.

In connection with the order, the Treasury Department requested information on regulations which could be “modified or eliminated” to reduce burdens on industry.  Better Markets responded in a comment letter, making three key points: First, in line with a legal challenge filed by Public Citizen in federal court, we argued that the Order is illegal, as it forces agencies to ignore Congress’s directives about how agencies must weigh costs and benefits when they issue rules.  The Order therefore violates the separation of powers clause, a host of statutes, and the ban against arbitrary and capricious rulemaking set forth the Administrative Procedure Act.

Second, we reviewed what’s at stake if the Order isn’t overturned: a very real threat of returning our markets to the days of unbridled recklessness, dangerous instability, and widespread fraud and abuse.  If the de-regulatory trend remains unchecked, the ultimate outcome will be another financial crisis, with devastating consequences that are all too familiar in the aftermath of the 2008 crash.

Finally, we argued that the Treasury Department should suspend its efforts to comply with the Order, at least until the court rules on the pending challenge.  Conserving its resources and staying focused on regulations that will protect and preserve our financial system should remain its priority.

Our comment letter, it should be noted, was the only one representing the voice and concerns of consumers and seeking to maintain vital financial protection rules.  All the others were from industry groups and others seeking changes and rollbacks of various regulations.  Political resistance is, to be sure, important.  But it is only half of the equation.  Policy resistance is the other half and, particularly regarding defending Dodd-Frank where the battles frequently are at the regulatory agencies and the courts, is just as important. 

Better Markets has, and will continue, to go head-to-head substantively with industry in the behind-the-scenes, hidden-from-view agency conference rooms where policy decisions are being made.


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