Vote Notes: H.R.4296, A Bill on Reserve Requirements for Banks
Sometimes the right thing at the wrong time can be the wrong thing.
Such was the case with the vote on Tuesday with regard to H.R.4296. Technically, this bill was called “To place requirements on operational risk capital requirements for banking organizations established by an appropriate Federal banking agency,” but what this means in plain English is that it reduced the reserve requirements for banks.
In a technical sense, what the bill tried to do made sense. The timing and the larger landscape in which it tried to do so, though, I believe was more than problematic...so much so that I voted no on a bill whose technical components I actually liked.
Let me explain.
What the bill did was to say that risk assessments to set capital requirements must be based on the bank’s future activity rather than its past activity. This made sense. If you used to sell oranges but then subsequently got out of doing so and were instead selling watermelons, this change said that going forward, your business risk must be based on the selling of watermelons rather than oranges. In the wake of the 2008 financial crisis, I believe that too much of what came in remedy was based on trying to fight yesterday’s battle rather than what might be shaping up on the battle line ahead.
All that made sense.
The timing, though, made no sense.
The Dodd-Frank bill that came in the wake of the 2008 financial crisis was allegedly designed around lowering systemic risk to our financial system. In many ways, it had the opposite of its intended effect, which is why I’ve long been against the bill.
But some of what they were trying to get at was very real, and it’s important that we not lose sight of the nature of systemic risk in any financial system. And I think at times focusing on very technical components, while excluding at the same time the macro environment that you’re operating in, is a mistake.
We can, in fact, see this with the way that the market has evolved since 2008 and arguably created more risk for each of us as participants in the financial system rather than less.
For instance, the money center banks, defined as the five largest banks in America, had less than 10% of total bank assets in 1990 but have grown to over 44% of bank assets today. This is important as one more data point in looking at the continuing of risk in our financial system, mind you a system that I believe is due for stress, given the underlying fundamentals of our capital markets and economy at large.
We’re currently in our 103rd month of continuous economic expansion, which is just short of the all-time record of 120 months. Trees don’t grow to the sky, and there is a reason for averages. A tree may grow to be a few hundred feet, but they don’t grow to be a few thousand feet. Mathematically, we are due for a recession, and when we go into one, it will put stress on our financial system.
This will be exacerbated by the Federal Reserve’s interest rate policy and their buying of assets since 2008. In fact, the Fed’s assets have swollen from about $750 billion to over $4 billion. What this really means is that they have less ability to maneuver when the next downturn comes.
The zero-rate interest policy itself has equally swollen asset values. This is true for stocks and bonds, just as it’s true for home prices and commercial real estate. As interest rates rise, once again more stress will be placed on our financial system. To give a sense of scale here, overall household net worth went up by $10 trillion in 2013 alone. Meanwhile, the price-to-earnings ratio for the S&P 500 has reached 26.8, which is higher than at any point in the 100 years prior to 1998 and 70% above the overall historical average. All of this is a long way of saying that what goes up, must come down if the law of averages is still to mean anything.
To add to this is the federal government’s spending spree. Again, that which can’t go on forever, doesn’t. And our spending, by any measure, is unsustainable.
In short, I believe that we’re due for a downturn. I don’t think it’s far out. When it comes, there will be strains in the economy and in the banking system. Consequently, I don’t think this is the time to be lowering capital reserve requirements for banks...and, as a result, I voted no. Again, though the bill technically made sense, I believe it’s timing could not be worse.