Republicans Lead Financial Regulation Rollback; Set Stage for Next Banking Disaster

Federal banking regulators are proposing to water down financial regulations passed to prevent another 2008 financial crisis, known at the Dodd-Frank Act.  Their efforts aim to weaken the "Volcker Rule" established under the Dodd Frank Act to protect consumers and investors.

Wall Street hates the Vocker Rule.  They want it gone so they can be free to do as they wish with limited oversight.  It's that simple.

The economy is finally in pretty good shape again after a financial crisis sent the world spiraling into what people feared might become a global depression. Ten years later, Republicans are in power in Washington and they working, with a little help from a minority of Democrats, to set the stage for a new banking disaster.

Regulators....will propose loosening the Volcker Rule, which was put in place to prevent banks from making risky bets with depositors’ money. The rule, which took five regulatory agencies more than three years to write, has been criticized by Wall Street as onerous and harmful to the financial markets.

The Fed will meet Wednesday [May 30, 2018] afternoon to propose a series of changes aimed at making the rule simpler and easier for banks to comply with, according to the people familiar with the proposal.

A series of changes they said.  Simple things to clarify the rule. Banks really want these changes.  RED FLAG.

....the people [familiar with the proposal] said that some small word changes are likely to usher in big changes on Wall Street.

.... allow banks to more freely engage in hedging, in which they execute trades in an effort to counteract risk in other parts of their businesses. Such trading had been curtailed by the Volcker Rule....

The change.... relieves banks of the responsibility for showing regulators specifically how their trades act as hedges.

Regulators are also expected to give foreign banks more freedom to engage in riskier trading activity overseas.

Simply put, this will promote speculative trading by banks by removing the upfront requirement that they show why it is a necessary hedge to make their institution safer.  Regulators can still go after banks if they believe they're engaging in risky behavior, but that requires significant efforts to prove it meaning little to no enforcement of the Volcker rule will occur.

Dodd-Frank.... largely eschewed big bank structural reform in favor of dozens of separate efforts to plug gaps and tighten screws.  Now Republicans are systematically loosening screws, unplugging gaps, and widening loopholes. 

While it’s no surprise that Republicans are acting to undo a law they almost uniformly opposed when it passed in 2010, back then Republicans claimed to have alternate solutions to the problems with the pre-crisis regulatory framework.  Today, they’ve completely given up on those alternate solutions. They’re tearing down the safeguards and putting nothing in their place while assuming, rightly, that nobody is paying attention.

One day there will be a price.

It all boils down to this:

The nature of bank regulation is that even when it’s done really, really poorly, the odds are overwhelming that on any given day nothing bad is going to happen.  As long as the economy is growing and asset prices are generally rising, a poorly supervised banking sector is just as good as a well-supervised one.

But when the music stops, and it always does, a poorly supervised banking sector can turn into a huge disaster.  It’s only a question of when.

Sources:

https://www.nytimes.com/2018/05/30/business/volcker-rule-banks-federal-reserve.html

https://www.vox.com/policy-and-politics/2018/5/31/17411924/trump-volcker-rule-republicans-big-banks