Senator Elizabeth Warren (D, Mass.) issued a fervent call on Wednesday for regulators to take a tougher stance on US banks, urging them to curtail the expansion of dominant financial institutions through mergers with smaller rivals.
Speaking at a Better Markets conference commemorating the 15th anniversary of the 2008 collapse of Lehman Brothers, Warren emphasized the existing framework allowing regulators to block detrimental mergers and underscored the need to hold them accountable for their responsibilities.
The debate over the assertiveness of banking regulators has rekindled fifteen years after the housing crisis and Lehman’s bankruptcy precipitated the most significant financial calamity since the Great Depression, prompting federal interventions to rescue several major banks.
This assistance bestowed upon specific institutions, often labeled as “too big to fail,” instigated a protracted national discourse on which banks should face more stringent regulation and how such oversight should be implemented.
In 2023, attention has returned to this issue as the banking sector grapples with one of its most trying years since 2008. In the spring, three substantial lenders, including Silicon Valley Bank and First Republic, succumbed to depositor withdrawals in a mass exodus. First Republic and Silicon Valley Bank’s collapses stand as the second- and third-largest bank failures in US history.
Regulators orchestrated the majority of First Republic’s sale to JPMorgan Chase, a transaction that Warren criticized for further magnifying the size of an already sizable institution. JPMorgan currently holds the top spot among US banks in terms of assets.
For Warren, a critical lesson from 2008 is the peril of consolidating excessive power in too few hands. Allowing major banks to assimilate smaller ones, in her assessment, only heightens these risks.
Directing her comments on Wednesday at Treasury Secretary Janet Yellen and Acting Comptroller of the Currency Michael Hsu, Senator Warren expressed her concerns about their apparent inclination towards endorsing more mergers of US banks.
“Despite all that we have learned since 2008 and despite President Biden ordering regulators to update merger guidelines, Acting Controller Hsu and Treasury Secretary Yellen have still signaled openness to more mergers,” Warren asserted.
This week, several CEOs from major banks pushed back against regulators for a different reason, contending that they are overreaching. They specifically cited new proposed capital rules, which they argue would impede lending and pose a threat to the US economy.
JPMorgan CEO Jamie Dimon characterized the new US proposal as requiring banks to bolster their capital buffers as “hugely disappointing,” cautioning that it could redirect more lending into private credit markets.
“Banks affected by the changes proposed in July will see an aggregate 16% increase in their capital requirements. Regulators say the increase would primarily affect the largest banks and that most have enough capital already to comply. Capital is the buffer banks have to hold to absorb future losses.”
These modifications are part of the US adaptation of an international accord known as Basel III, developed in response to the 2008 crisis by the Basel Committee on Banking Supervision.
Goldman Sachs CEO David Solomon did not mince words when he voiced his dissent on Tuesday about the proposed change. “I don’t think these rules make sense,” he declared.
Several bank trade groups also lodged a letter with the Federal Reserve, the Federal Deposit Insurance Corporation, and the OCC on Tuesday, urging them to “re-propose” the rule, arguing that the initial proposal relied on data and analyses not made available to the public.
Senator Warren further advocated for a change in how US banks are scrutinized, drawing on lessons she asserted were gleaned from 2008. She called on Congress to pass legislation permitting regulators to claw back executive bonuses and compensation in the event of a bank failure.
In June, the Senate Banking Committee passed the RECOUP Act on a bipartisan basis, a bill allowing the FDIC to claw back compensation from senior executives at failed banks going back two years. This legislation, a more moderate version of Warren’s original proposal, which also garnered bipartisan support, will now move to the full Senate for consideration.
“In a broken system, like the one we have, we know who gets ahead no matter who they’ve harmed. And that’s Wall Street executives. That was true in 2008. And it is true today,” Warren concluded.
Source: Yahoo Finance
