Hillary Clinton’s Prescription For Banks Is A Huge-Non-Starter

I was planning on reading the full text of the speech on economic policy Hillary Clinton gave at the New School here in New York last week, but worried it would be so full of Hillaryesque focus-group-tested blather that I might nod off over it on the train home and miss my stop. So instead I relied on American Banker’s story the next day to get the gist of what Hillary had to say. This nugget stood out:

[Clinton] vowed to “go beyond Dodd-Frank” to institute reforms to mitigate major firms’ risk and complexity and said concerns are not limited to just commercial banks.

“Too many of our major financial institutions are still too complex and too risky. And the problems are not limited to the big banks that get all the headlines,” she said. “Serious risks are emerging from institutions in the so-called shadow banking system, including hedge funds, high-frequency traders, nonbank finance companies—so many new kinds of entities which receive little oversight at all.” [Emph. added.]

Zzzz . . . uh, oh, sorry. Where was I? To hear certain prominent voices within the Democratic Party, there will never be a circumstance wherein the country’s major financial institutions aren’t “too complex and too risky.” As it is, Dodd-Frank substantially bolstered banks’ minimum capital and liquidity requirements, and forced banks to simplify by exiting certain businesses. Basel III added additional capital requirements. Last week, a survey by the American Action Forum said that mandates from Dodd-Frank have added $24 billion in annual compliance costs industrywide. The survey also noted regulators have written and finalized 456 new rules stemming from the law, with more on the way. Monday, the Fed added its own incremental capital requirements for the eight largest banks that will, among other things, require J.P. Morgan Chase to add $12.5 billion in new capital.

All this, and yet if I’m reading Hillary Clinton’s comments right, it’s still not enough. Perhaps she envisions a financial services Eden where are all banks are small and have simple business models that are easy for outsiders to understand. It’d be the sort of banking system, now that I think of it, that prevailed in most of the country during the 1920s and proved so durable after the Great Depression hit. As far as that goes, the non-complex, non-risky banking institutions Hillary seems to believe are ideal would be hopelessly ill-equipped to serve large, global corporations. Those companies would then presumably drop U.S. banks entirely and take their business to institutions domiciled in countries that haven’t made a fetish of how big their banks are.

(Nor will I remind you, yet again, that the big banks’ large size and various arcane businesses, the existence of which still has the left’s panties in a knot, had nothing to do with causing the 2008 panic. Rather, it was credit. Too many lenders lent too much money to too many borrowers who couldn’t pay it back. When an entire financial system sits on a pile of assets of questionable value—in this case, subprime mortgages—as happened in 2008, no one is going to trust each other’s balance sheet, and the system is going to freeze up. Which is exactly what happened.)

It’s as if these people prefer to relentlessly scapegoat rather than fix problems. Anyway, the truly entertaining part of Hillary’s comments last week wasn’t her ritual denunciation of the big banks, but rather her sudden concern over the “shadow banking system.” Can we back up and recap the state of play?  Congress passes a law, and encourages a regulatory mindset, that basically forces banks out of certain businesses (market-making, say) and certain types of lending (leveraged loans come to mind), and then policymakers are surprised when the providers of those services react to the new regulations by leaving the banking system entirely. What did policymakers think would happen? I assume that Hillary’s next solution will be to expand regulators’ reach beyond banks to financial services providers generally. At which point—and policymakers will be surprised by this, too—many newly regulated businesses will leave the country entirely.

The banking system of course needs to be regulated. At the peak of the last cycle, banks were clearly engaging in activities that, viewed in retrospect, were imprudent. But a sensible regulatory regime would balance safety of the system with the prudent and efficient creation of credit. Hillary Clinton’s solution seems to be to keep on piling on the banks. That’s not apt to make the system much safer, nor, worse, would it likely create an environment in which the economy could adequately grow.

What do you think? Let me know!