Nearly a decade on from the 2007-08 financial crisis, it is clear that the federal regulatory regime is not working. The Dodd-Frank Act, with a fixation on financial stability at any cost, has led to the slowest economic recovery in modern American history and, ironically, an inherently unsound financial sector.
The U.S. economy relies on a smoothly functioning financial system to facilitate economic growth after a downturn. While Wall Street grabs much of the attention, the real driver of American industry is small- and medium-sized banks that finance local businesses. Sadly, post-crisis regulations have made this kind of lending increasingly difficult. As U.S. Chamber of Commerce Vice President Thomas Quaadman noted in his testimony, small commercial and industrial loans have risen a mere 0.188% from their 2008 lows. This is overwhelmingly due to the burden of new regulations that Dodd-Frank imposed.
One of the main culprits for the increased burden is the designation of medium-sized banks, such as First Horizon National Corporation—whose Executive Vice President, Charles Tuggle, also testified before the Committee—as Systemically Important Financial Institutions (SIFIs). Currently, banks with $50 billion in assets are designated as SIFIs and are subject to a swath of enhanced prudential and supervisory standards. This asset threshold is a completely arbitrary standard, which places no focus on whether an institution is actually a systemic risk, or if its activities warrant heightened regulation. Undoubtedly, compliance costs have increased as a result, leaving firms to focus less on servicing their customers.
Fortunately, there is a legislative solution. A bill sponsored by Rep. Blaine Luetkemeyer (R-MO), the Systemic Risk Designation Improvement Act, addresses many of the concerns of SIFI designations. Instead of an arbitrary asset threshold, the bill directs the Federal Reserve to look at interconnectedness, cross-border activities, and complexity when assessing their regulatory requirements. Subjecting medium-sized regional banks that predominately take deposits and have limited exposure to derivatives or trading to the same standards as large, complex, globally connected financial institutions makes little sense. First Horizon’s Tuggle also stressed this point: “By any objective measure, most banks designated today as being ‘systemically important’ in reality pose no systemic risk at all, either domestically or globally.” Piling on a mountain of new regulation is a bad idea, but at the very least, it should be tailored to address the institutions it is intended to influence.
Many regulations imposed in the wake of the financial crisis did nothing to address its cause. Instead, the legislative response was to enforce restrictions that have entrenched the doctrine of “too-big-to-fail,” harmed small- and medium-sized banks, and slowed the growth of the real economy. Meanwhile, large government-sponsored enterprises like Fannie Mae and Freddie Mac, the lending requirements of the Community Reinvestment Act, and the Federal Reserve’s easy money—the real causes of the crisis—have yet to be dealt with. The current legislative efforts to lift the burden off the financial sector through common sense reforms, such as Rep. Luetkemeyer’s bill, are a good first step in a long march towards a secure and prosperous financial system. But in order to achieve this, Congress needs to do more than tinker around the edges. Getting the government out of regulating, subsidizing, and protecting the financial services sector will allow firms to get back to growing the economy without the risk of another tax-payer funded bailout.