Ensuring that financial institutions have adequate capital buffers is an essential line of defense against the bubbles and busts that have characterized the US business cycle in recent decades, at great cost to the living standards of most households. So I was happy to see the Fed’s proposal to kick up banks’ reserve requirements, especially for the ones involved in more complex, riskier trades.
And then there’s the House. I give them some credit for coming up with a 92% omnibus budget bill, where, unlike the continuing resolutions they’ve relied on in recent years, they appropriated new spending levels for 11 out of 12 agencies through next September. The exception is Homeland Security, which just gets a CR through February—their way of complaining about the President’s recent immigration action.
But they also jammed in some language to weaken aspects of Dodd-Frank, most notably a measure intended to hive off derivative trading from the part of the bank that’s insured by taxpayers. According to the NYT, this attack on the “Volcker rule” was largely written by Citibank…not good.
The bill that Citigroup helped draft: This bill would repeal one of the more contentious provisions in Dodd Frank, requirement that banks “push out” some derivatives trading into separate units that are not backed by the government’s deposit insurance fund. The proponents of the pushout rule argued that it would isolate risky trading from parts of a bank eligible for a government bailout.
My understanding of the new House measure is that it doesn’t repeal “push-out,” but instead pulls back in a bunch of categories of derivative trades—exempting them from Volcker coverage.
There are some other big problems with the agreed upon spending levels in the House bill, one of which—a cut to the IRS budget—that I’ll write about ASAP as this is a real concern of mine. In my view, it’s basically House R’s trying to promote and facilitate more tax avoidance.
The contrast between the Fed and the Congress on the fin reg stuff is just a crystal clear lesson on the value of political independence at the Fed. Yes, their regulators suffer market capture too–look at their inaction around housing bubble. I could also see pushing the equity buffer up higher than is being proposed; the risk here is almost always on the side of doing too little. Also, risk-weighting the buffers—requiring more exposed institutions to hold more capital–is probably more art than science, and whenever there’s leeway in this sort of market regulation there’s the strong potential for regulatory capture/failure.
But there’s just no question that the Congress is a shopping mall for the banking lobby in a way that the Fed is not.