PD Editorial: Banks don’t need more protection, consumers do

It was 10 years ago this weekend that Bear Stearns, the fifth-largest U.S. investment bank, collapsed, heralding a meltdown of the industry and setting off the worst economic downturn in the United States since the Great Depression. Ten years later, it’s safe to say that big banks are doing much better. It’s also safe to say that some elected leaders have forgotten the promises that were made to consumers to never let something like this happen again.

Bank profits this year have been record-breaking, and large financial institutions stand to benefit significantly from the Trump tax cuts. But the president and congressional Republicans apparently feel banks need more help. The Senate on Wednesday voted 67-31 on a bill that would ease rules on banks enacted following the financial crisis of a decade ago.

On the positive side, the bipartisan Senate bill is a much tamer and more tolerable alternative to the highly partisan House legislation that seeks to eviscerate all of the Dodd-Frank reforms, something President Donald Trump has vowed to do.

Many of the provisions of Dodd-Frank remain intact under the Senate version, which provides modest relief to community banks and customers who have found it unduly difficult to get a loan.

Still, the Senate bill comes with some significant takeaways, including relaxing restrictions on large regional banks with assets of between $50 billion and $250 billion. Before now, these large banks have been considered “too big to fail” which, under Dodd-Frank, requires them to undergo mandatory “stress tests” every year to ensure that they have a sound exit strategy should they reach the brink of collapse.

While many agree that ?$50 billion is too low a threshold for this kind of a standard, there’s no question that ?$250 billion is too high. Let’s not forget that it was the collapse of Countrywide Financial, which had about $200 billion in assets in 2008, that set off panic in the mortgage market.

As former Sen. Chris Dodd, D-Connecticut, noted in a column in The Hill last week, $250 billion “is too high and raises the danger of a cascading economic effect.”

“Of the 6,500 banks in the U.S., only 10 or 12 would be subject to heightened supervision,” the former chairman of the Senate Banking Committee wrote. “That poses too great a risk.”

What remains a greater risk is that Congress, encouraged by the White House, may go even farther in dismantling Dodd-Frank, including eviscerating the Consumer Financial Protection Bureau, now headed by Trump’s budget director Michael Mulvaney, who had been an outspoken critic of the bureau. In fact, the undoing of the office appears to already be happening.

Since his appointment as acting director in the fall, Mulvaney has moved to cut funding to the bureau, drop high-profile lawsuits against predatory payday lenders and roll back consumer protections.

The Congressional Budget Office notes that the changes proposed by the Senate bill would create increased risk of another crisis, although the risk is small. Conditions, thankfully, are far from where they were 10 years ago.

But the purpose of the Dodd-Frank reforms was not just to protect against such a crisis ever occurring but to ensure we never get close. That can’t be forgotten.

All of these changes may help banks, but they put consumers and the economy that much more at risk.