Reducing banks’ regulatory burden is easier said than done

A recent Wall Street Journal article reported on the slow pace of a major Republican initiative to ease the regulatory burden on the U.S. banking industry, especially on the largest banks. That there has been little progress in reducing this burden is hardly surprising:

• Banking legislation Congress has enacted over the years is complex and sometimes works at cross-purposes because of conflicting legislative goals.
• Sharp ideological differences between Republicans and Democrats and divided control of Congress greatly impede legislative initiatives to reduce this burden.
• The process for developing and modifying the all-important regulations that implement banking legislation is itself complex and slow-moving.
• There is growing resistance to easing regulatory constraints on banks, especially the largest banks, due to increasing fears that the United States may soon stumble into a recession, potentially leading to another financial crisis.

Congress has piled law upon law upon the banking business since 1863, when it enacted the National Bank Act. The creation of the Federal Reserve in 1913 and the Federal Deposit Insurance Corporation (FDIC) in 1933 expanded federal regulation of the banking business, once largely the province of the states.

Periodic crises since the Great Depression have led to additional congressional legislation, notably to resolve the savings-and-loan crisis in the 1980s and an increase in bank failures shortly thereafter. 

More recently, of course, was passage of the Dodd-Frank Act in 2010, which was intended to prevent a repeat of the 2008 financial crisis, which triggered the Great Recession. The adverse effects of that recession still linger within the global economy.

Like all major pieces of legislation, Dodd-Frank had many flaws, some of which Congress attempted to rectify last year when it passed the Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155).

These are not simple laws. For example, the printed version of Dodd-Frank spreads over 863 pages while S. 2155 is about one-tenth that length. These laws, though, are just the tip of the proverbial iceberg because extensive, highly detailed regulations have to be written to implement them.

The three major bank regulatory agencies — the Federal Reserve, the FDIC and the Comptroller of the Currency — have the primary responsibility for writing these regulations, but other agencies often are involved, too, including the Consumer Financial Protection Bureau, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

One law firm identified 398 regulations that would have to be written or revised to implement Dodd-Frank. S. 2155 unleashed another wave of regulation writing.

The cumulative effect of these laws and the hundreds of regulations they have spawned has been to construct a horribly encrusted regulatory edifice that cannot easily, nor quickly, be reformed.

It is extremely challenging to untangle this regulatory mess, in large part because the federal Administrative Procedure Act (APA) governs the highly legalistic process under which regulations are written, amended or repealed. 

In particular, the APA’s “notice and comment” requirement permits interested parties, most often those entities directly affected by a regulation, to comment on and object to any proposed changes in existing regulations or the wording of new regulations.

While this commenting process keeps lots of high-paid lawyers and consultants employed advocating for their clients and employers — an essential element of the democratic process — it is a slow, tedious activity that often produces muddled results because of the conflicting interests of the affected parties, who often number in the thousands.

Because the current Congress is unlikely to resolve contentious regulatory issues, the burden to do so continues to fall on the regulators, working within the constraints of existing law and the processes dictated by the APA. It is unlikely that the president understands or is very sympathetic to these constraints, yet they are there.

My perspective on easing banking’s regulatory burden in the near term is an admittedly pessimistic outlook, but sadly a realistic one given the current highly divisive political environment.

Perhaps someday, the environment will be more conducive to financial regulatory reforms that will lead to a more efficient financial system that also is safe and sound.  When that will be, if ever, is anyone’s guess.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system and the growing federalization of credit risk. Prior articles by Ely on banking issues and cryptocurrencies can be found here.  Follow Bert on Twitter: @BertEly.