On February 3rd 2017 President Trump signed Executive Order #13772 calling for a system of reviews, first due in 120 days, of the U.S. financial, investment and banking system for possible reform. Today Treasury Secretary Steven Mnuchin released the first in a series of reports (full pdf below) outlining the U.S. Financial System.
Given the breadth of the financial system and the unique regulatory regime governing each segment, Treasury will divide its review of the financial system into a series of reports:
• The depository system, covering banks, savings associations, and credit unions of all sizes, types and regulatory charters;
• Capital markets: debt, equity, commodities and derivatives markets, central clearing and other operational functions;
• The asset management and insurance industries, and retail and institutional investment products and vehicles; and
• Non-bank financial institutions, financial technology, and financial innovation.
Today’s report covers the depository system.
The full report is below and it is rather extensive. Here’s my initial review of the content with the report embedded at the bottom.
Back in July 2010 when Dodd-Frank banking regulation was passed into law, there were approximately 12 to 17 banks who fell under the definition of “too big to fail”.
Meaning 12 to 17 financial institutions could individually negatively impact the economy, and were going to force another TARP-type bailout if they failed in the future. Dodd-Frank regulations were supposed to ensure financial security, and the elimination of risk via taxpayer bailouts, by placing mandatory minimums on how much secure capital was required to be held in order to operate “a bank”.
One large downside to Dodd-Frank was that in order to hold the required capital, all banks decreased lending to shore-up their liquid holdings and meet the regulatory minimums. Without the ability to borrow funds, small businesses have a hard time raising money to create business. Growth in the larger economy is hampered by the absence of capital.
Another downstream effect of banks needing to increase their liquid holdings was exponentially worse. Less liquid large banks needed to purchase and absorb the financial assets of more liquid large banks in order to meet the regulatory requirements.
Unfortunately, because of Dodd-Frank by 2016 those twelve banks had merged into only four even bigger banks that were now even bigger risks; albeit supposedly more financially secure in their liquid holdings. This ‘less banks’ reality was opposite of the desired effect.
The four to six big banks (JP Morgan-Chase, Bank of America, Citigroup, Wells Fargo, US BanCorp and Mellon) now control $9+ trillion (that’s “TRILLION). Their size is so enormous that small group now controls most of the U.S. financial market.
Because they control so much of the financial market, instituting a Glass-Steagall firewall between commercial and investment divisions (in addition to the Dodd-Frank liquid holding requirements), would mean the capability of small and mid-size businesses to get the loans needed to expand or even keep their operations running would stop.
2010’s “Too few, too big to fail” became 2016’s “EVEN FEWER, EVEN BIGGER to fail”.
That’s the underlying problem for a Glass-Steagall type of regulation now. The Democrats created Dodd-Frank which: #1 generated constraints on the economy (less lending), #2 made fewer banking options available (banks merged), #3 made top banks even bigger.
This problem is why President Trump and Secretary Mnuchin are working to create a parallel banking system of community and credit union banks that are external to Dodd Frank regulations (less than $10 billion asset based) and can act as the primary commercial banks for small to mid-sized community businesses.
The goal of “Glass Steagall”, ie. Commercial division -vs- Investment division, is created by generating an entirely new system of banks under different regulation. The currently remaining ten U.S. “big banks” operate as “investment division banks” per se’, and the lesser regulated community banks/credit unions operate as would be the “Commercial Side”.
Instead of firewalling an individual bank internally within its organization, the Trump/Mnuchin plan looks to be setting up a system for firewalling the banking ‘system’ within the U.S. internally. [See page 132 appendix “B” Table of Recommendations]
Hope that helps to make sense as you review the first of the reports: