Condemned to Repeat the History of Bank Failures?
'The 2008 crisis showed what happens when financial regulation is weakened while the economy is strong. The Trump administration is doing it again.
The Federal Reserve is sufficiently concerned about the health of the economy that it has hit the pause button on further interest rate increases, and rightly so. The Fed left its benchmark interest rate unchanged Wednesday, and Fed officials predicted no rate increases during the rest of 2019 — which would be the first year without a rate increase since 2014. But at the same time, the Fed and other agencies keep chipping away at financial regulation — a course of action that threatens to hasten the arrival of the next economic downturn, and to make it more painful.
Barely a decade has passed since the recklessness of major financial institutions helped to catalyze the largest economic crisis since the Great Depression. Many Americans have yet to recover their losses. Yet somehow, the lessons of the crisis already appear to be fading.
The government has loosened a number of the key strictures imposed on banks and other financial firms in the wake of the 2008 crisis, and more leniencies are in the pipeline. In particular, the government is allowing large banks to rely more on borrowed money as a source of funding, even as it has reduced scrutiny of their lending decisions.
The government should take advantage of this prolonged period of economic tranquillity to strengthen the banking industry’s defenses, before the next downturn.
To force large banks to get ready for the bad times during the good times, the Fed created a tool after the 2008 crisis called countercyclical capital buffering. Banks borrow most of the money they lend to customers, but the Fed requires banks to obtain a small portion of their funding from sources that do not need to be repaid — for example, by selling shares to investors or retaining profits. These funds are called capital; the amount of capital is the amount of losses a bank can endure without defaulting on its obligations. Under the countercyclical policy, the Fed can order banks to increase these capital buffers in periods of economic growth.
This would seem like such a time. But earlier this month, the Fed declined to act. Instead it is moving to let banks shave their capital buffers.
The Trump administration argues that deregulation will spur economic growth, by freeing banks to make more loans. This is wrong in two distinct ways.'>>>
https://www.nytimes.com/2019/03/20/opinion/trump-bank-regulation.html?
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