Sip slowly, this explainer was hard to write. There is a considerable amount of perplexed frustration following on the heels of Treasury Secretary Steven Mnuchin testifying to the Senate Banking Committee earlier today and specifically saying:
02:20 Glass-Steagall? “we do not support a separation of banks from investment banks, we think that would have a very significant problem on the financial markets, on the economy, on liquidity; and we think that there is proper things that potentially we could look at around regulation, but we do not support a separation of banks and investment banks.”
That statement runs counter to the Trump administration’s prior policy statements outlining a preference for a reinstatement of some form of “Glass-Steagall” regulatory separation between commercial banking and investment banking.
In essence when combined with the totality of Mnuchin’s testimony before the committee, Mnuchin is saying the current “too big to fail” (‘too big to succeed’) issue has created a problem for lending liquidity. Specifically, if divisional separation is required – the banks best interests would naturally put the investment division ahead of commercial lending and the liquid capital within the overall economy would shrink.
I think we have a handle on what the administration is doing based on the executive orders signed and explained earlier. Bear with me…
Back in July 2010 when Dodd-Frank banking regulation was passed into law, there were approximately 12 to 17 banks who fell under the definition of “too big to fail”.
Meaning 12 to 17 financial institutions could individually negatively impact the economy, and were going to force another TARP-type bailout if they failed in the future. Dodd-Frank regulations were supposed to ensure financial security, and the elimination of risk via taxpayer bailouts, by placing mandatory minimums on how much secure capital was required to be held in order to operate “a bank”.
One large downside to Dodd-Frank was that in order to hold the required capital, all banks decreased lending to shore-up their liquid holdings and meet the regulatory minimums. Without the ability to borrow funds, small businesses have a hard time raising money to create business. Growth in the larger economy is hampered by the absence of capital.
Another downstream effect of banks needing to increase their liquid holdings was exponentially worse. Less liquid large banks needed to purchase and absorb the financial assets of more liquid large banks in order to meet the regulatory requirements.
In 2010 there were approximately twelve “too big to fail banks”, and that was seen as a risk within the economy, and more broad-based banking competition was needed to be more secure.
Unfortunately, because of Dodd-Frank by 2016 those twelve banks had merged into only four even bigger banks that were now even bigger risks; albeit supposedly more financially secure in their liquid holdings. This ‘less banks’ reality was opposite of the desired effect.
The four to six big banks (JP Morgan-Chase, Bank of America, Citigroup, Wells Fargo, US BanCorp and Mellon) now control $9+ trillion (that’s “TRILLION). Their size is so enormous that small group now controls most of the U.S. financial market.
Because they control so much of the financial market, instituting a Glass-Steagall firewa