From the Fed’s own orifice, commercial bank deregulation is on the table
This is a brief excerpt from NFTRH 923 discussing proposed bank deregulation, which certainly would dovetail with Chairman Warsh’s stated goals of economic growth while limiting inflation signals. Of course, that second thing would be expected to be temporary, but politically expedient in the near-term. It is only one component of a market report that went into much more macro detail in related areas, currently in play.
Here Piggy Piggy…
Another primary tool that could come in very handy for the new Fed in the new macro is bank deregulation. Here, Northern Trust discusses just that, after a speech by Fed vice-chair Michelle Bowman.
A new generation of Federal Reserve leadership is open to easing some of the regulatory burden. Vice Chair for Supervision Michelle Bowman has laid out a plan to modify the “four pillars” of bank capital: stress testing, leverage ratios, risk-based capital requirements, and the surcharge for systemically important banks. In recent comments directly addressing the rise of private lending, Governor Bowman proposed a reduction in capital requirements for lower-risk corporate loans.
Advocacy is most prominent from the Federal Reserve, as private credit has grown far more in the U.S. than in any other market. Banks have better retained their lending market share in other developed markets. Regulators abroad have presented more obstacles for non-bank financial intermediaries, and banks have been more willing to work with higher-risk borrowers; in the U.S., banks are less capable of taking larger credit risks.
Reforms will extend beyond credit. Under Bowman’s direction, bank examiners will apply a higher standard for formal notifications of bank shortcomings. Significant regulatory findings will only be raised where they present clear risk to a bank’s financial condition. She is also advocating to reform the accounting standards to calculate reserves for loan losses. Pressure from the Fed may clear the way to ease these rules, which have been most burdensome for smaller banks.
In other words, bye bye Dodd-Frank. Through the unfettered excesses that built up in the banking system, lax regulation brought us the disaster of Armageddon ’08, my term for the “great financial crisis” of the time. But before that it underpinned a whole hell of a lot of market and economic liquidity (and excessive, misallocation of resources and well, grift).
Gold led, silver caught on, oil, uranium, copper, China, EM, etc… the “inflation trades” of the time, against the developing credit bubble in the US. This was the result of banks not only free to create MBS, but to create them and other suspect “financial vehicles” to sell to the public, booking the gains ASAP and kicking the Black Swan disaster can down the road. Finally, in 2007-2008 something broke, and the whole mess imploded.
But if you actively fought the system as a bear from 2003 to 2007, when the mess finally liquidated you were not around to enjoy the crash. If you played the system, and got out in time, you made a lot of money.
This is the door the Fed is hinting to step through. Will they be able to relieve the pressure just enough so that sound commerce does not devolve into the wild west of excess that resolved in 2008? Maybe. But human nature being what it is, once the door is cracked open and all that money is at stake, might we not envision some time down the road another disaster? I might.
It’s genius, really. Deregulate, and do it before the mid-terms, I assume the deregulationists would aim for. Time is of the essence. This policy could also sustain or enhance the bull into the next presidential election as well. If the blueprint is indeed 2003-2007 (here let’s remember I am just presenting theories for consideration and refinement), the theoretical fallout to the theoretical plan may not come until after the presidential election.
Longer-term, I don’t see much to dissuade from a high risk view, with human nature and greed being what they are (and were in 2003-2008). Agree with Dodd-Frank or not, it was put in place for a reason. Removing it could echo that previous phase. It’s been 16 years of Dodd-Frank. That’s enough time for enough people to have forgotten the lessons of why it was enacted to begin with.
As a side note, whom do you suppose could pick up the slack in the mortgage market as the Fed unloads MBS? A deregulated banking industry, perhaps? This time promising not to repeat the excesses of the past. On their honor! <sarcasm>
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