The Dodd-Frank regulations are protecting large banks from competition and smothering the economy, the exact opposite of what policymakers intended, argues Abby McCloskey, program director at the American Enterprise Institute.
The problem is that banks are branded systemically important financial institutions (SIFIs) if they have over $50 billion in assets, McCloskey writes in an op-ed for the American Banker.
In addition to the six Wall Street banking giants, 27 regional banks fall into the too big to fail SIFI category by virtue of their size. But they lack typical features of too big to fail banks.
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They are not deeply interconnected, they lack complicated business strategies or trading operations and they do not get to borrow at the lower rates that the larger banks do.
"To be sure, it would be terrible if any of these regional banks failed. But no one thinks PNC or Zions Bank pose an existential danger to the U.S. economy," McCloskey states. "After disposing of hundreds of bad banks during the financial crisis, the Federal Deposit Insurance Corp. could handle their failure in a weekend."
Lumped together with the banking behemoths, the regional banks are forced to meet a long list of expensive, burdensome regulations on capital cushions, liquidity, stress testing and living wills.
"Not surprisingly, there aren't many banks jumping up and down to enter the SIFI club," McCloskey argues. "In fact, there are now about 10 U.S. banks hanging just below the $50 billion threshold."
In other words, regulations protect the current SIFIs against competition.
"For those banks already designated, SIFI rules are a wet blanket on business," she explains. "This is bad news for the economy. The SIFIs are responsible for the vast majority of credit. Unduly paralyzing these institutions with new rules will slow economic growth and keep credit tighter for longer."
The broad SIFI definition also distracts regulators from focusing on firms that pose real risks to the economy, she warns. "Even regulators privately admit the threshold is a distraction."
The solution is to eliminate the arbitrary $50 billion limit and use realistic risk factors to name systemically important firms.
Dodd-Frank "hurts little guys by lumping regional banks alongside JPMorgan and Citibank, requiring the same thresholds of capital," Mike Chadwick, a financial planner in Connecticut, tells the New Britain Herald.
"I’m not sure Dodd-Frank has added a lot to protection," Pete Gioia, economist for the Connecticut Business & Industry Association, tells the Herald. "But it has added enormous cost to financial institutions for compliance. It seems like a lot of overkill without the likelihood of avoiding problems in the future."
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