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Will the Fed Deregulate Us Into a New Major Crisis?

October 30, 2018—Tomorrow, according to an Oct. 29 report in the American Banker, the Federal Reserve Board of Governors is expected to take up the matter of implementing S. 2155, the major banking deregulation bill that was passed in the spring of this year. “Specifically, the Fed will unveil details on how it may supervise banks with between $100 billion and $250 billion of assets,” the Banker article says.

Will the Fed Deregulate Us into a New Major Crisis?

Fed Chairman Jerome Powell at his swearing-in (federalreserve.gov)

S. 2155 lifts a number of the regulations imposed on U.S. banks in the wake of the 2008 crisis, by loosening the need for stress tests and potentially reducing the Liquidity Coverage Ratio (reserves required to cover potential risk). However, the law gives leeway to the Fed as to what regulatory measures to maintain, and how frequently.

Republicans in Congress have been agitating for exempting all banks with less than $250 billion in assets from the “enhanced supervision” mandated in the wake of the crisis. Letters to this effect were sent to the Fed by nearly 30 House members in September, and by a number of Senators in August. The Senate letter was initiated by Sen. David Purdue (R-GA), whose arguments have been effectively countered by Americans for Financial Reform.

According to the American Banker article, the House Republicans went so far as to argue that the maximum possible deregulation should be enacted because “there have been no past or present findings of systemic risk.” Some Congressmen and Senators are even arguing for loosening of regulations for banks which have more than $250 billion in assets, as well as reducing “risk-based capital surcharge.”

No Systemic Risk?

The absurdity of the claim of no systemic risk should be apparent to the average observer, given the further consolidation of the banking system since 2008. Far more threatening than the recent losses on the stock and bond markets, is the mountain of highly leveraged debt which has been issued by already-indebted corporations. In an interview with the Financial Times last month, Yellen said she was “worried about the systemic risks” in corporate leveraged loans. Yellen pointed in particular to the repackaging of this debt (into Collateralized Loan Obligations-CLOs) by the banks, into a market that is totally unregulated, and highly reminiscent of the Collateralized Debt Obligations (CDOs) which played a crucial role in the crisis of 2008. This specie of corporate debt alone is estimated to have reached the level of $1.6 trillion.

Of course, these CLOs represent only one among many debt bubbles, including student loans and auto loans.

Yellen is a late-comer to the group of economists warning of a potential new systemic crisis, one which is widely anticipated to be more catastrophic than the last. Warnings have come from former Federal regulators and, in a mild form, the IMF itself, in addition to economists who are generally eschewed by the mainstream media.

To get a good overview of the dimensions of the new crisis brewing, and its similarity to that of 2008, readers are advised to watch the video  of the Sept. 26 panel discussion at the National Press Club on this question. The situation begs the question of the re-imposition of Glass-Steagall  regulations as the only immediately available means of containing the looming crisis.

 

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