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Bank Regulation: Is it for Better or for Worse?

Senate BHAre the rules and agencies put in place to prevent a repeat of the 2008 financial collapse actually setting us up for a repeat after all?

That depends, of course, on whom you ask. For U.S. Sen. Richard Shelby (R-Alabama), chairman of the Senate Committee on Banking, Housing, and Urban Affairs, the answer is yes. For U.S. Sen. Sherrod Brown (D-Ohio), ranking member of the same committee, the answer is no.

At the recent Senate hearing on bank capital and liquidity rules, Shelby stated that the “complexity of the current capital and liquidity regime” is actually a tangled set of rules telling bankers how to be bankers, rather than regulations that allow bankers to operate effectively.

“We should be able to agree that regulators should regulate banks, not run them,” Shelby said. “Some believe that every one of the new capital and liquidity regulations is needed to guard against the next crisis. I worry that such complexity, however, could contribute to the next crisis.”

Shelby said that the “vastly complex regulatory system” created as a response to a specific crisis “could increase systemic risk, while giving a false sense of security that the system is safer than it is.”

He cited “stress tests”‒‒annual tests designed to see whether the banks can withstand adverse economic scenarios‒‒as an example of something regulators put their faith in that could actually be misleading because regulators “are unwilling to stress-test their own capital and liquidity rules to see whether those rules will result in more or less liquidity should a crisis occur.”

Shelby

Richard Shelby

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Sherrod Brown

He added: “We simply do not know if these rules are tailored appropriately to both prevent and handle the next financial crisis.”

Across the aisle, Brown defended the system, citing FDIC Chair Martin Gruenberg’s recent observation that at the end of 2015, large banks had twice as much Tier 1 capital and liquid assets in proportion to their assets as they had entering the crisis.

Gruenberg had said that “the evidence suggests that the reforms put in place since the crisis have been largely consistent with, and supportive of, the ability of banks to serve the U.S. economy.”

“In addition to instituting much-needed reforms to bank capital, liquidity, risk management, and other standards,” Brown said in response to Shelby’s address,” Wall Street reform tailored its approach to the regulation of community banks.”

The effect on small banks was immediate and substantial, Brown said.

“When the change was implemented in the second quarter of 2011, small banks’ assessments fell by one third, saving these banks over a billion dollars,” he said.

He concluded his own remarks by pointing to the steady economic recovery that has occurred because of regulations in place.

“The recovery from that crisis has required a sustained period of record-low interest rates that have compressed banks’ profit margins,” Brown said.

About Author: Scott Morgan

Scott Morgan is a multi-award-winning journalist and editor based out of Texas. During his 11 years as a newspaper journalist, he wrote more than 4,000 published pieces. He's been recognized for his work since 2001, and his creative writing continues to win acclaim from readers and fellow writers alike. He is also a creative writing teacher and the author of several books, from short fiction to written works about writing.
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