Trump, GOP Deregulatory Efforts Send Clear Message: We Don’t Care If Banks Can Weather the Next Recession
Washington D.C. – It’s now reported all 18 of the biggest U.S. banks have passed this year’s stress tests, having met the minimum capital requirements that determine their ability to absorb losses in the event of an economic downturn. And all but one were given the green light to increase the level of payouts to shareholders. But consumer watchdog group Allied Progress cautioned we’re not seeing anything close to a complete picture after President Trump signed Republican-sponsored, Wall Street-approved legislation last year watering down risk-assessment rules for two dozen of the largest banks that collectively hold over $3.5 trillion in assets (and received over $45 billion in TARP bailout funds after the 2008 financial crisis). Stress tests have also become far less rigorous under this administration, for example the loss to banks simulated in the 2018 test was half of what the test in 2013 simulated.
“What we’re seeing is a blurry and incomplete snapshot of the banking industry’s health, and anyone who tries to use it as an excuse to further weaken banking oversight and accountability cannot be taken seriously,” said Derek Martin, Director of Allied Progress. “The stress tests established under Dodd-Frank after the financial crisis have been one of the most effective tools the government has to keep our financial system stable. If a major bank that got a huge taxpayer bailout during the last crisis is on shaky ground again today, the public should know about it. But thanks to the Trump administration and Congressional Republicans in the pocket of Wall Street, major institutions that oversee trillions of dollars in assets have far less of a burden to prove they can stay standing if the economy tumbles.”
Added Martin:“As the administration has moved to scrap or weaken hundreds of financial industry regulations and has gone totally soft on enforcement, the big banks have taken bigger and bigger risks like leveraged lending. Meanwhile, the administration does not even care to know whether this increasingly risky behavior has left these institutions less stable. That is a recipe for economic disaster. It’s on Congress to restore transparency and ensure the banks are actually on the strong footing they claim to be.”
WHAT YOU NEED TO KNOW:
The Trump Administration Has Already Relaxed Big Bank Stress Tests—And Threatens To Further Weaken The Critical Dodd-Frank Protection
Stress Tests, A Critical Safeguard Mandated By Dodd-Frank, Require Big Banks To Prepare For Shocks And Prudently Manage Their Capital.
Stress Tests Are “One Of The Most Important Policy Developments Following The Largest Financial Crisis Since The Great Depression.”
House Financial Services Committee Chairwoman (HSFC) Maxine Waters And Several Other Committee Members Have Argued That “Stress Tests Required By The Dodd-Frank Wall Street Reform And Consumer Protection Act” Are “One Of The Most Important Policy Developments Following The Largest Financial Crisis Since The Great Depression. House Financial Services Committee (HSFC) Chairwoman Maxine Waters and eight other members stated, “One of the most important policy developments following the largest financial crisis since the Great Depression was the enactment of stress testing for our nation’s largest banks. H.R. 4293 would make several harmful changes to the current bank stress test regime, specifically the stress tests required by the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as the Comprehensive Capital Analysis and Review (CCAR) program administered by the Board of Governors of the Federal Reserve System.” [H. Rept. 115-593, U.S. House of Representatives, 03/13/18]
Stress Tests Are A Safeguard Against The Next Financial Crisis, Requiring Banks To Prepare For “Unexpected Risks [That] Can Quickly Materialize And Tank Our Economy,”
To Prepare For “Unexpected Risks [That] Can Quickly Materialize And Tank Our Economy,” Banks Have Been Required To “Add More Than $700 Billion In Capital To Absorb Potential Losses.” In March 2018, HSFC Democrats stated, “U.S. banks added more than $700 billion in capital to absorb potential losses since the financial crisis of 2007–2009. Even though banks are well capitalized today, we should not let complacency allow us to overlook how unexpected risks can quickly materialize and tank our economy. We should also not forget the lessons of the financial crisis and how costly and painful that was for our constituents and the country.” [H. Rept. 115-593, U.S. House of Representatives, 03/13/18]
A “Key Architect” Of Dodd-Frank Financial Reform Has Argued It Would Be A “Serious Mistake” To “Hamstring” Stress Tests.
A “Key Architect” Of Dodd-Frank Has Called Stress Testing A “Central […] Risk Management Tool,” And Argued That “It Would Be A Serious Mistake To […] Hamstring” The Policy. “Former Assistant Secretary of the Treasury, Michael Barr, testified that, ‘stress testing is a central and innovative risk management tool used since the financial crisis by both regulators and practitioners. Unlike fixed capital ratios, of either the risk-based or leverage ratio type, stress testing seeks to understand how macro shocks would deplete capital. It would be a serious mistake to . . . hamstring stress testing by the Fed.’” [H. Rept. 115-593, U.S. House of Representatives, 03/13/18]
- Michael Barr Was A “Key Architect Of The Dodd-Frank Wall Street Reform And Consumer Protection Act Of 2010.” “Dean Barr was on leave during 2009 and 2010, serving in President Barack H. Obama’s Administration as the U.S. Department of the Treasury’s assistant secretary for financial institutions, and was a key architect of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.” [“Michael S. Barr,” Gerald R. Ford School of Public Policy, accessed 06/19/18]
The Number Of Banks Subject To Stress Tests Has Been Slashed By Thousands—And Trump’s Federal Reserve Has Moved To Dilute The Requirements Even Further.
The Federal Reserve Said It Would Make This Year’s Tests “More Accommodating” After Banks Complained About Past Stress Tests, Even Though The Vast Majority Of Banks Easily Pass.
After Banks Complained About Past Stress Tests, The Federal Reserve Said They Would Make The 2019 Tests “More Accommodating.” “The industry had been tracking the 2019 testing closely, as Fed officials have said they would like to make the tests more accommodating, amid bank gripes that prior rounds have been overly harsh and resource-intensive.” [Pete Schroeder, “Fed gives banks more stress test information, unveils 2019 scenarios,”Reuters, 02/05/19]
Despite Banks’ Complaints About The Difficulty Of Stress Tests, 34 Of Them Passed, Two Received “Conditional Approvals,” And Just One Was Rejected. “Thirty-four lenders passed the test last year, while Goldman Sachs and Morgan Stanley received conditional approvals that limited their capital distributions. The U.S. subsidiary for Deutsche Bank had its capital plan rejected by the Fed.” [Pete Schroeder, “Fed gives banks more stress test information, unveils 2019 scenarios,”Reuters, 02/05/19]
“U.S. Banks Are Likely To Sail Through Their Stress Tests” This Year. “U.S. banks are likely to sail through their stress tests this Friday, but the results are still important. They will determine their capital needs well into the future.” [Aaron Back, “A New Source of Stress for Banks,” The Wall Street Journal, 06/19/19]
A Major 2018 Deregulatory Bill Has Already Reduced The Number Of Banks Subject To Stress Tests By “Thousands.”
A 2018 Deregulatory Bill Has Already Raised The Threshold For Banks Required To Undergo Stress Tests From $50 Billion To $250 Billion. “The bill’s most controversial provision would increase the threshold from $50 billion to $250 billion for a bank to be considered systemically important. These so-called ‘too big to fail’ banks must undergo mandatory Fed ‘stress tests’ every year, complete a ‘living will’ directing how they could be wound down safely if they failed, and face other stricter safety rules. Just about everyone seems to agree that $50 billion was too low a threshold, inundating banks that don’t really pose systemic risks and don’t really need living wills with heavy compliance costs and headaches. But many experts believe $250 billion is too high.” [Michael Grunwald, “Behind The Dodd-Frank Freakout,” Politico, 11/08/18]
- The Bill, S. 2155, “Economic Growth, Regulatory Relief, and Consumer Protection Act,” Was Signed Into Law On May 24, 2018. [Actions Overview, 2155 – Economic Growth, Regulatory Relief, and Consumer Protection Act, U.S. Senate, 11/16/17]
S.2155 Allowed Banks With Less Than $250 Billion In Assets To Be Exempt From Stress Testing. “The changes would relax federal oversight of banks with assets of less than $250 billion, including a requirement that such institutions face so-called stress tests.” [Alan Rappeport and Emiliy Flitter, “Congress Approves First Big Dodd-Frank Rollback,” The New York Times, 05/22/18]
- 2155 Freed “Thousands Of Banks” From Post-Crisis Rules. “The legislation will leave fewer than 10 big banks in the United States subject to stricter federal oversight, freeing thousands of banks with less than $250 billion in assets from a post-crisis crackdown that they have long complained is too onerous.” [Alan Rappeport and Emiliy Flitter, “Congress Approves First Big Dodd-Frank Rollback,” The New York Times, 05/22/18]
The Federal Reserve Has Moved To Turn Parts Of The Stress Tests Into An “Open-Book Exam” And Remove The “Toughest Hurdle” For Banks To Pass, Even As The Tests Have Generally Grown Less Rigorous In Recent Years.
Instead Of Making Stress Tests Tougher, The Federal Reserve Is Decreasing Bank Transparency And Making Parts Of The Tests Akin To An “Open-Book Exam.” “The Fed should be toughening up these tests, and acting on the results more energetically. In fact, it’s pushing in the other direction. […] Now the Fed is moving toward so-called ‘enhanced transparency,’ which will actually shed less light on banks’ risks. It has released details of its model, making the exercise more like an open-book exam. It intends to give banks the results before they submit plans to pay out capital, so they can make any necessary changes without drawing attention.” [Editorial Board, “Bank Stress Tests Need To Be More Stressful,” Bloomberg, 06/18/19]
Randal Quarles, The Federal Reserve’s New Bank Supervision Head, Wants To Remove A Part Of The Tests That Have “Proven To Be The Toughest Hurdle For Banks To Surmount,” But Can Identify Risks. “Worse, the Fed’s new head of bank supervision, Randal Quarles, wants to soften the tests in another way, by removing a requirement that banks stay above a minimum leverage ratio. This simple ratio of equity to assets was designed as a backstop to regulatory capital ratios, which place smaller weights on safer assets but can miss important risks. In previous tests, it has proven to be the toughest hurdle for banks to surmount.” [Editorial Board, “Bank Stress Tests Need To Be More Stressful,” Bloomberg, 06/18/19]
Stress Tests Have Gotten Less Rigorous Since The Crisis — The Loss To Banks Simulated In The 2018 Test Was Just Half Of What The 2013 Test Simulated. “Moreover, the tests are getting less stressful as the memory of the 2008 crisis fades: The 2018 exercise simulated a combined net loss of just 0.7% of assets at the four largest banks, less than half what they endured in the 2013 round.” [Editorial Board, “Bank Stress Tests Need To Be More Stressful,” Bloomberg, 06/18/19]
Financial Experts Have Argued That Stress Tests Aren’t Tough Enough On Banks And Their Results Can Be “Misleading,” Creating A False Sense Of Security That Could Make Another Financial Crisis More Likely.
Bloomberg’s Editorial Board Has Argued That Stress Tests “Don’t Come Close To Mimicking A Real Crisis,” AndThe More People Believe Them, The More Likely Another Crisis Becomes.”
Bloomberg’s Editorial Board Argued That Stress Test Results Are “Misleading” People Into Believing Banks Are Safer Than They Are, Increasing The Likelihood Of “Another Crisis.” “Later this week, the Federal Reserve will release results from its most recent round of stress tests, in which it subjected the country’s largest banks to a hypothetical economic slump and market meltdown. Most if not all of the participants will pass, suggesting that they’re amply capitalized and can safely pay out more of their income to shareholders. Unfortunately, the banks aren’t as safe as they look. The results are misleading, and the more people believe them, the more likely another crisis becomes.” [Editorial Board, “Bank Stress Tests Need To Be More Stressful,” Bloomberg, 06/18/19]
Bloomberg’s Editorial Board Argued The Stress Tests Aren’t As Rigorous As They Need To Be And “Don’t Come Close To Mimicking A Real Crisis.” “The tests have never been as tough as they need to be. For one, they don’t capture important second-round effects — such as how financial and economic distress, as well as cash crunches and asset sales, reinforce one another to amplify losses. This means that even the harshest-looking hypothetical scenarios don’t come close to mimicking a real crisis.” [Editorial Board, “Bank Stress Tests Need To Be More Stressful,” Bloomberg, 06/18/19]
Not A Single Big Bank Failed This Year’s Stress Tests—For Only The Second Time Ever.
All 18 Of The Biggest U.S. Banks Passed This Year’s Stress Tests And All But One Of Them Were Given A Free Pass To Increase The Payouts They Dole Out To Shareholders.
For Only The Second Time, The Federal Reserve Gave Passing Grades On Every Single Big Bank’s Stress Tests And Allowed All But One Of Them To “Increase Their Payouts” To Shareholders. “Banks have gotten better at taking the test, now in its ninth year, amassing enough capital and know-how to maximize shareholder payouts without failing, Fed officials said. The 18 banks, a group that includes giant U.S. lenders JPMorgan Chase & Co. and Bank of America Corp., are expected, in aggregate, to increase their payouts to more than 100% of expected earnings. […] Goldman was cleared to return $8.8 billion to shareholders over the next year, up from $6.3 billion, including its biggest-ever dividend boost to $1.25 from 85 cents. Morgan Stanley can return $8.2 billion to shareholders in dividends and buybacks over the next year, up from $6.8 billion.” [David Benoit and Lalita Clozel, “Federal Reserve Clears Big Banks to Boost Payouts to Investors,” The Wall Street Journal, 06/27/19]
- All 18 Of The Biggest Banks Tested Passed The “Annual Exercise Designed To Gauge Banks’ Ability To Withstand A Recession.” “All 18 banks reviewed, a group that includes giant U.S. lenders JPMorgan Chase & Co. and Bank of America Corp., passed round two of the Federal Reserve’s stress tests, an annual exercise designed to gauge banks’ ability to withstand a recession.” [David Benoit and Lalita Clozel, “Federal Reserve Clears Big Banks to Boost Payouts to Investors,” The Wall Street Journal, 06/27/19]
- The Fed “Dinged” Only Credit Suisse And Will Allow The Bank To “Retake The Test” In What’s Known As A “Mulligan.” “The Fed dinged Credit Suisse Group AG over its projections for trading losses in the test and gave it four months to improve its capital-planning processes. Under a process known as the mulligan, banks are allowed to adjust their capital-return plans and retake the test if their initial proposals would put them below the line.” [David Benoit and Lalita Clozel, “Federal Reserve Clears Big Banks to Boost Payouts to Investors,” The Wall Street Journal, 06/27/19]
- “It Was Only The Second Time Since The Fed Began Administering The Exams That No Bank Failed.”[David Benoit and Lalita Clozel, “Federal Reserve Clears Big Banks to Boost Payouts to Investors,” The Wall Street Journal, 06/27/19]