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The Wall Street Journal On The Conceit Of Dodd-Frank
A Choice for Wall Street: The House votes for a sturdier, less politicized financial system.
"Dodd-Frank is built on the conceit that the same regulators who
missed the last crisis will somehow predict the next one as long as they
have more power. But there will inevitably be another mania and panic,
and regulators always miss them. The definition of a financial mania is
that everyone thinks the good times will last forever.
Financial
Services Chairman Jeb Hensarling’s Financial Choice Act addresses this
tragic flaw by offering banks an option: Stay subject to Dodd-Frank’s
costly regulations, or hold capital equal to 10% of assets in return for
more lending freedom and less red tape.
Banks lend with taxpayer-insured deposits, and high levels of capital
are a guardrail for taxpayers and shareholders. If the guardrails are
high enough, banks can afford to take more risks without bank examiners
second-guessing every loan. We’d prefer even higher capital levels, but
Mr. Hensarling
is raising the bar while moving banks away from their Dodd-Frank
status as de facto public utilities.
Democrats call this a favor
to Wall Street, but note that the biggest banks oppose the Hensarling
bill. They’ve prospered under Dodd-Frank because they can more easily
absorb compliance costs than can smaller competitors. By one estimate
the average capital ratio of the seven largest banks is around 7%, while
most regional or community banks hold 10% or more in capital.
The
big banks have also grown bigger, with the five largest now holding
more than 40% of U.S. banking assets. Some industry consolidation was
inevitable after the crisis, but community banks have been selling out
or closing at a rapid rate. The Federal Reserve Bank of Richmond reports
that from 2010 through 2013 only four new banks were started in the
U.S. Before the panic the average was 100 a year. All of this has cut
lending for new small businesses essential for faster economic growth."
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