Washington - The Trump administration is more than halfway through the
120 day review of financial regulation that the president ordered on February 3. Time flies!
And the hot new idea is well an old idea; the
Glass-Steagall Act, a Depression-era law which, until its repeal in 1999,
separated federally insured commercial banks from risk-taking investment banks.
Some say the law's repeal helped lead to the panic of 2008
and that reinstating it would stabilize Wall Street more than the convoluted
Dodd-Frank law enacted in 2010.
Gary Cohn, the Wall Street veteran who heads the National
Economic Council, expressed willingness this month to consider a 21st-century
Glass-Steagall, in keeping with certain vague 2016 campaign remarks by Donald
Trump and a line in the Republican platform.
What that might mean in practice is still anyone's guess. A
bipartisan group of senators including Elizabeth Warren, D-Mass., and John
McCain, R-Ariz., seized on Cohn's remark to reintroduce their long-standing
proposal to restore Glass-Steagall pretty much as it was in the 20th century.
Thomas Hoenig, vice chairman of the Federal Deposit
Insurance Corp, has a more nuanced plan that would allow commercial and
investment banks to exist within the same overall corporate structure, but with
clearly separate capital and management so taxpayers faced no exposure to the
riskier investment side's losses.
Such a "ring-fencing" plan has been adopted in
Britain; a key component is a tough capital requirement 10 percent for the commercial bank, as an added
protection against systemic risk and taxpayer bailouts. Hoenig's proposal calls
for a similar buffer.
An irony of the situation is that some of today's behemoth
"universal" banks got that way because at the height of the crisis
the government encouraged consolidation between, say, Bank of America and the
failing Merrill Lynch investment bank. It would take tremendous effort - by
legislators and bankers - to split them up again.
The actual causal link between the repeal of Glass-Steagall
and the financial crisis is a matter of great dispute, however, because the
investment firms whose failures triggered the panic, Bear Stearns and Lehman
Brothers, had never been subject to the law.
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What they lacked was sufficient capital to weather a crisis;
accordingly, beefed-up capital throughout the financial sector is what's
essential to protect against another meltdown, wherever it might originate.
It so happens that Dodd-Frank, despite its undue complexity,
has been fairly successful in forcing banks to build capital. This is why the
Federal Reserve found last year that the US banking system could withstand
"a severe global recession with the domestic unemployment rate rising five
percentage points."
In fact, Wall Street's main complaint is that excessive
capital requirements are forcing them to restrict lending - though FDIC data
show that bank lending grew 5.3 percent in 2016 while the industry made healthy
profits.
No doubt the financial sector would love to steer President
Trump's Dodd-Frank rewrite in the direction of relaxed capital requirements.
Whatever else a 21st-century Glass-Steagall turns out to mean, it must not be
that.