Here’s a shocking revelation: bank owners don’t like to take loses even more than regulators. Know why? Because bank owners put their own money into their bank to capitalize it. Regulators don’t. Yet the current bank regulatory environment has gotten so regulator-driven that Fed, OCC and FDIC bank regulators make most decisions about bank capital.
They may be good at regulating, but they don’t have a clue about running a bank and they aren’t expected too. The fact is that both bankers and regulators should live by a set of rules. That does not happen today; regulators make up new rules on a whim, they are not held accountable for their actions and regulatory excess is the major reason for the anemic economy during the entire 8 years of Obama.
A few TBTF bankers got greedy during and before the Great Recession. Know what? The other 6,000 banks did not. But these community banks are suffering under the yoke of extreme excess by bank regulators. It has been ten long years (2007 is when regulators brought out the first CRE 1 and 2 and new capital guidelines) of this regulatory excess; it is time to right the ship and hold bank regulatory agencies accountable to a set of reasonable rules. The nation and our economy will benefit tremendously. – Jay Davidson
Results give ammunition to Trump administration for scaling back postcrisis rules
The Federal Reserve building in Washington. Next week, in the second part of its stress-test results, the Fed will release its decision whether to approve banks’ plans to return capital to shareholders.Photo: andrew caballero-reynolds/Agence France-Presse/Getty Images
WASHINGTON—The largest U.S. banks survived a hypothetical “stress test” and could continue lending even during a deep recession, the Federal Reserve said, a strong report card that could bolster the industry’s case for cutting back regulation.
In the first part of its annual tests, the Fed on Thursday said 34 of the largest U.S. banks have significantly improved their defenses since the 2008 financial crisis. The results signal that many banks could win the Fed’s approval to increase dividend payouts to investors next week, in the second round of the tests.
The outcome gives ammunition to the Trump administration and congressional Republicans who see some of the rules put in place after the financial crisis as excessive and want to ease them in the name of boosting economic growth. Supporters of the rules say healthy banks show the regulations are working, not that they need to be rolled back.
“Anticipation of some form of Trump-led deregulation could not be any higher,” William Hines, an investment manager at Aberdeen Asset Management, wrote in an email Thursday. “The banks themselves are lobbying hard for it, and a clear bill of health from the stress tests will help their cause. But it is anything but a foregone conclusion.”
The exams are one of several new drills that banks must run in the name of preventing a repeat of the 2008 crisis and subsequent federal bailouts, from liquidity rules preventing a short-term cash crunch to “living will” bankruptcy plans.
This year’s results come in the midst of a broad rethink of those rules. Last week, the Treasury Department released a banking policy report that recommended the Fed consider changes to the stress tests.
The Treasury report said no firm, even the largest, should have its capital plans rejected for solely “qualitative” reasons. Fed officials are already considering that change. In the second round of the tests, scheduled to be released next week, the Fed typically judges banks’ “qualitative” risk-management practices.
The report also said the tests should occur only once every two years, instead of annually, except “in the case of extraordinary events.” It said the Fed should solicit public input on the tests, including the hypothetical scenarios and mathematical models.
Fed officials have resisted similar recommendations in the past when they were suggested by bankers, saying they would undermine the exams by making them less flexible. Fed governor Jerome Powell, the Fed’s regulatory point man, said in Senate testimony Thursday that the Fed would solicit public input on how to make the tests more transparent.
Mr. Powell said he believes it would be appropriate to exempt “firms that achieve and sustain high-quality capital planning capabilities” from the qualitative part of the exams, meaning the largest U.S. banks could win that exemption in future years.
He also said the Fed is open to other rule changes, but not a reduction in risk-based capital requirements. “I don’t think what we’re talking about here amounts to…broad deregulation,” Mr. Powell told the Senate Banking Committee. “I think it amounts to making regulation more efficient.”
Any broad rollback of rules would take time. The Trump administration has few officials in place at the banking regulators. And efforts to change regulations in Congress must overcome potential opposition from Senate Democrats.
Sen. Sherrod Brown, the ranking Democrat on the Senate Banking Committee, said Thursday that policy makers could undo important consumer protections if they push to deregulate too far. “There is no evidence that relaxing rules will lead banks to lend more,” Mr. Brown said at Thursday’s hearing.
It was the third straight year the initial results showed all big banks meeting the Fed’s definition of good health. A Fed official said big banks finished the hypothetical downturn with an even higher level of capital than they had before the 2008 crisis began.
The more closely watched part of the annual tests occurs next Wednesday, when the Fed will release its decision whether to approve, or block, banks’ plans to return capital to shareholders through dividends or share buybacks. The positive results may also allow banks to make larger payouts than in past years.
This week’s results don’t necessarily predict the Fed’s verdict next week. In some previous years, banks have shown strong capital ratios in the first part of the tests, only to be deemed as failing in the second round, which uses a broader set of criteria. Thursday’s results don’t include banks’ individual capital-distribution plans.
The Fed said the banks would experience collective loan losses of about $383 billion but still meet its required minimum capital ratios, even in a hypothetical scenario that envisions the U.S. unemployment rate more than doubling to 10% and severe strains in corporate-loan and commercial real-estate markets.
Fed officials attributed the positive results to the fact that banks have worked through problematic loans like soured mortgages, while steadily increasing loss-absorbing capital on their books as a result of stiffer postcrisis requirements.
Fewer banks are expected to come up short in the second round of tests next week than in previous years. This year, only 13 of the largest, most complex banks will have to take the qualitative exam. Fed officials say that reflects its conclusion that, broadly, banks have improved their ability to track risks in real time.
The stress tests were first conducted in 2009 to help convince investors that the banking system wasn’t about to collapse. They are now a legal requirement to force banks to think about the possibility of an unexpected crisis.
The Fed said the 34 banks collectively maintained at least 9.2% high-quality capital as a share of assets on one measurement, staying well above the Fed’s 4.5% minimum even after being pounded by a severe economic downturn. The Fed changes the details of its recession scenarios from year to year.
Credit cards were one trouble spot for banks, with loan losses rising 9% from last year’s test to $100 billion. U.S. card performance has recently been weakening at several lenders, driven in part by an increase in subprime borrowing. Fed officials said they were finding higher delinquency rates in bank card portfolios at the same time that card lending was increasing.
A new bar for banks to clear in this year’s test was the supplementary leverage ratio, which applied to the largest and most complex banks. That measure, which comes into effect in 2018, is meant to indicate whether banks also hold sufficient capital to cover their off-balance-sheet exposures. That includes derivatives contracts, a big cause of the panic of 2008. A handful of banks, including Morgan Stanley and Goldman Sachs Group Inc., fell within a couple percentage points of the minimum for that ratio during the Fed’s hypothetical scenario. That could end up limiting their shareholder payouts.
In addition to Thursday’s public results, banks also learned privately whether their individual plans to return capital to shareholders would push them below the Fed’s minimum required threshold. If that happens, they may take a one-time shot at cutting their request for dividends or buybacks to stay above the Fed’s minimum requirement.