Dick Bove is sometimes said to be pro big banks (to put it in short – and we are not taking a position on him or his proposals other than we enjoy his commentary – for someone considered to be “pro big banks”) he is not too happy with a GOP proposal to change Dodd-Frank rules – he thinks the results would actually be a disaster even though he admits that he respects Jeb Hensarling he thinks the capital proposals will be disastrous and cause a depression.
As AFR a progressive group opines:
Americans for Financial Reform issued the following statement on a proposal outlined yesterday by Rep. Jeb Hensarling:
Jeb Hensarling, the Texas congressman who chairs the House Financial Services Committee, has been a steadfast opponent of the Dodd-Frank Act and, for that matter, of just about all efforts to rein in the excesses of Wall Street and safeguard consumers against fraudulent or deceptive financial products and practices.
Most Americans approve of the reforms in Dodd-Frank and want to see financial regulation made tougher, not weaker. But Rep. Hensarling said recently that he “will not rest – and my Republican colleagues on the House Financial Services Committee will not rest – until we toss Dodd-Frank onto the trash heap of history.”
This week he outlined a plan to do just that. In addition to repealing many of the reform measures adopted in response to the financial crisis of 2008, Hensarling would burden regulators with a series of crushing new procedural duties that would massively increase the difficulty of enforcing the rules his plan theoretically leaves intact.
While Hensarling’s new “analysis” requirements would enormously hamper every financial regulatory agency, his plan takes special aim at the Consumer Financial Protection Bureau. It would specifically block the Bureau from acting against discriminatory auto lending and moving ahead with a proposal to curb the use of forced arbitration clauses that prevent consumers from suing banks and lending companies in court – a key instrument of Wall Street accountability. It would take away the Bureau’s independent funding, forcing it to depend on annual congressional appropriations. Instead of being led by a single director, the CFPB would be placed under a board of commissioners appointed by party leaders – a well-known formula for weak regulation at best and gridlock at worst.
The plan also guts the Financial Stability Oversight Council, created by Dodd Frank to identify and respond to dangerous new buildups of systemic risk, while adding major new barriers to effective risk oversight at the Federal Reserve as well. Before any of the financial regulators could do just about anything meaningful, they would need to secure the approval of both houses of Congress, as well as weather a wave of industry lawsuits facilitated by language in his proposal that would make it far easier to overturn agency actions in court.
Rep. Hensarling is very anxious to be perceived as something other than a pawn of Wall Street and predatory lenders, despite the heaping sums of money they have contributed to his campaign coffers. Although details are lacking, he says his plan includes higher bank capital standards and tougher penalties for bank wrongdoing. But in yet another piece of his proposal, he takes away authority that the Justice Department currently has to investigate and prosecute financial crime.
In short, this plan doesn’t get tough on banks; it gets tough on the regulators policing them. It would dramatically weaken their ability to do their jobs, and make it correspondingly easier for Wall Street banks, shadow banks, and lending companies to profit by ripping off consumers and engaging in reckless and dangerous short term speculation, rather than by providing loans, capital, and financial services on fair and transparent terms.
Now see Bove’s commentary below.
Richard X. Bove, Vice President Equity Research at Rafferty Capital Markets, Jeb Hensarling’s new proposals for banking.
New Banking Proposal – More Capital
Representative Jeb Hensarling (R.; TX) heads the House Financial Services Committee. Mr. Hensarling unveiled his new proposals for banking in a speech delivered to the Economic Club in New York, this morning. Plus, he is making the rounds of the business networks outlining his ideas. In a few weeks, he will introduce a bill to Congress to redefine banking regulation.
From my perspective Mr.Hensarling is one of the more impressive members of Congress. His understanding of the challenges posed by the current banking regulation is superior to virtually any legislator in the country or overseas. He understands that:
- The issues that led up to the financial collapse in 2008 are far more complex than simply stating that the banks did it.
- The regulatory solutions put in place have impeded the growth of the United States economy and promise to do more harm to the financial system if they are not removed.
- That the very nature of democracy in this country has been impacted by the new regulatory regimes.
Anyone who has been following what has been written about banking regulation in these commentaries over the past 7 years know how much I agree with this guy’s views. House Speaker Paul Ryan (R.; WI), some months ago, gave Mr. Hensarling the responsibility to develop a comprehensive solution to the nation’s banking regulatory problem.
My understanding is that Mr. Ryan wanted a broad solution to the nation’s banking issues. Presumably, this meant looking at the position of the United States in global financial markets; it meant determining how banking and non-banking companies should co-exist to strengthen the United States economy; it meant developing a concept of how Fintech works and what would make it more effective; and it meant how to provide more financial services at lower prices to the American consumers and businesses. Apparently, none of this was done.
Mr. Hensarling’s speech provided the broad outlines of his solution. The approach appears to be twofold:
- Make some adjustments to the current Dodd Frank legislation:
- Eliminate the Volcker Rule;
- Take back the power ceded to independent agencies
- Congress regains control over their decision making and
- Decisions are to be made by bi-partisan committees, not one person as under the current system;
- Eliminate the power of the Financial Services Oversight Committee (FSOC) to designate any company as “systemically important;”
- Limit the power of the banking regulators to regulating banks alone;
- Ease a number of regulations that apply to small banks (these to be specified in the expected new legislation);
- Allow any bank that has a 10% common equity to assets ratio and a CAMELS 1 or 2 rating to avoid all Dodd-Frank regulations.
This last proposal is actually less onerous than I had thought. A surprisingly large number of banks already have well over the 10% required. Note the table on the next page. There are 37 banks in the United States with assets over $25 billion. They are pretty much evenly split. 19 do not have 10% common equity to asset ratios and they would be forced to raise $54 billion in aggregate. Two banks JPMorganChase (JPM/$65.32/Buy) and Wells Fargo (WFC/$5.27/Hold) would be expected to raise 62.7% of this amount or $34 billion.
Eighteen other banks within this group would have excess common equity equaling $80 billion. In this case three banks, Citigroup (C/$45.55/Buy), Bank of America (BAC/$14.36/Buy), and Capital One