There Is Not a Single Good Reason to Deregulate Banks Right Now. Democrats Are Helping It Happen Anyway.

ST HELIER, JERSEY - APRIL 11:  Buildings in the financial area of St Helier including the offices of US bank Citibank are seen on April 11, 2017 in St Helier, Jersey. Jersey, which is not a member of the European Union, is one of the top worldwide offshore financial centres, described by some as a tax haven, as it attracts deposits from customers outside of the island who seek the advantages of reduced tax burdens. In 2008 Jersey's gross national income per capita was among the highest in the world. However, its taxation laws have been widely criticised by various people and groups including the EU. As the UK negotiates its exit from the EU having triggered Article 50, concerns have been raised as to how this will affect the future of the financial industry on the island especially as The chancellor, Philip Hammond has claimed Britain could also become a corporate tax haven if the EU fails to provide it with an agreement on financial market access after Brexit.  (Photo by Matt Cardy/Getty Images)
Banks are doing just fine. Matt Cardy/Getty Images

Just ten years after the financial crisis, Congress has decided that it’s time to start deregulating the banking industry again.

On Tuesday, a coalition of Republicans and moderate Democrats voted 67 to 32 to move along a bill loosening some of the key regulations Congress passed in 2010 to prevent another financial crisis. The bill’s Democratic supporters, such Virginia’s Mark Warner and Montana’s Jon Tester, claim they are simply trying to make “commonsense fixes” to the Dodd-Frank Act in order to free up credit unions and smaller banks from burdensome rules designed to prevent a Lehman Brothers-style collapse. But while that may be their goal, the legislation—which has been exhaustively and excellently covered by journalist David Dayen—would make it easier for community banks to hide wrongdoing like discriminatory lending, while leaving the financial system at least slightly more vulnerable to a disaster by freeing large regional banks from regulatory scrutiny. As written, there is also a chance it could end up easing restrictions on a pair of too-big-to fail giants, JPMorgan and Citibank—restrictions that were designed to keep them from leveraging up with too much debt.

But you don’t need to wade into the details of this bill to understand why it’s so infuriating. The bottom line is that there just isn’t any good reason to be deregulating finance in 2018.

The legislation’s Democratic backers have argued that Dodd-Frank went too far when it came to regulating community and regional banks, and that easing some rules will free up credit for rural areas and small businesses. As Warner put it in a statement, “The goal is simple: to help Main Street by rolling back unnecessary and burdensome regulations on credit unions and small community banks.” If Dodd-Frank was truly throttling the banking system with red tape, though, you would expect to see some signs that Americans were having trouble borrowing. But there simply aren’t any. There is no sign of a credit shortage in the United States—on Main Street or any other street.

Let’s start with the big picture. Interest rates have been extremely low, suggesting that there’s more than enough credit available to meet demand. Meanwhile, business lending has been healthy; the value of outstanding commercial and industrial loans has risen 79 percent since 2010.

Commercial and industrial loans

Total mortgage debt has roughly returned to its pre-crisis peak.

Mortgage debt outstanding

As a percentage of the economy, credit to the private sector is hovering right around where it was in 2005, before the final manic stages of the nation’s mid-oughts borrowing binge.

Credit as a percentage of GDP

Credit doesn’t seem to be scarce in rural America, either. Farm lending, for instance, pretty much shot up like a corn stalk after 2010.

Farm lending

And small businesses owners? They appear to have more credit available than they know what to do with. Here’s how the Federal Reserve summed up the situation its most recent report on small business credit:

Overall, between 2012 and 2017, credit conditions for small businesses were largely stable. Favorable supply conditions prevailed throughout most of the period, coupled with weak loan demand from small business owners. By 2017, credit flows to small businesses had improved, though they remained below their pre-crisis levels.

In other words, money was still plentiful and cheap after Dodd-Frank. The problem was that not enough small business owners wanted to borrow.

What about the supposed plight of community banks, which lobbyists claim are being throttled by all of Dodd-Frank’s red tape? There’s really not much to worry about. For starters, these plucky local financial institutions are perfectly profitable. According to the Federal Deposit Insurance Corporation, community banks averaged an 8.67 percent return on equity in 2017, about the same as the banking industry overall. And while lending recovered more slowly at small banks than large ones following the financial crisis, business has been brisk lately; loan balances at community banks rose 7.7 percent last year, compared to just 1.7 percent across all banks.

Banking lobbyists try to elide all of this, pointing out that while small banks may be earning money, their numbers are shrinking. This is true. Over the years, droves of community banks having chosen—some would say have been forced—to merge with bigger rivals. And after the recession, bank startups pretty much ground to a halt. From 1976 to 2009, more than 130 banks were chartered each year, on average. From 2010 to 2015, just four were chartered in total. The industry likes to blame Obama’s regulations, which forced small banks to spend more on regulatory compliance. “While community banks remain resilient in the face of regulatory and economic pressures, it defies reason to suggest that their growth and ability to serve customers has been unhurt by Dodd-Frank and the massive regulatory burden it represents,” American Bankers Association President Rob Nichols wrote in 2016.

This argument is not especially convincing. Independent community banks have been disappearing for decades, as they’ve merged with or sold themselves off to larger rivals. Much of the industry’s consolidation has been driven by regulatory changes in the 1990s, which allowed large banks to more easily set up shop across state lines. But the trend dates back at least to the Reagan era. There’s also an obvious reason for why new banks stopped popping up after the recession: The economy was terrible and interest rates were near zero, making it nearly impossible for newly chartered financial institutions to make any money. When a pair of Federal Reserve economists looked at the issue in 2016, they concluded that at least 75 percent of the decline in bank startups after 2010 could be explained by factors other than regulatory issues. “The standalone effect of regulation,” they added, “is more difficult to quantify.”

But let’s step back for a moment. Why do people care about community banks in the first place? In theory, it’s because those banks are more focused on small business lending than big financial institutions like Wells Fargo or Bank of America. If small, local banks disappear, lobbyists argue, it will be harder for small-town entrepreneurs and mom and pop shops to get loans. In fact, there’s little evidence that’s true. As the Federal Reserve explains in its small business credit report: “Numerous research studies directly analyze the relationship between consolidation activity and the availability of credit to small firms. Although mergers and acquisitions sever existing bank–firm relationships and may introduce some short-term uncertainty, the results of the research generally suggest that, overall, they have not materially reduced credit availability.” Consolidation doesn’t even seem to reduce local competition all that much. Despite the massive increase in overall industry concentration over time, the average number of banks in large metro areas, small towns, and rural areas has barely budged since the year 2000.

Despite all of this, a dozen Democrats and one independent who caucuses with the party have decided that now is the time to loosen the banking industry’s leash. The politics aren’t hard to fathom. Community banks are a sympathetic constituency that wield a great deal of lobbying power in Washington. Meanwhile, many red state Democrats are coming up for re-election this year and—foolishly or not—they’re desperate to prove their bipartisan bonafides by voting with the President. So, this bill is sailing through, even if it might make the financial system a bit less stable. And moderates Dems are asking us all to suspend our disbelief, to act as if their sop to the industry is about anything other than a crass campaign calculation. “This election has nothing to do with this,” said Tester said recently. “This has everything to do with access to capital.” If that’s true, it has everything to do with a problem that doesn’t exist.