Should The US Regulate Big Banks To Reduce Their Power?

Politicians have long argued over the importance of regulating big banks — those so-called “too big to fail” institutions whose over-lending led to the housing bubble bursting in 2008 — and to the longest recession in American history. How do we keep a bank’s power in check? Should we even try? And how do we punish banks that use their power to wend through legally gray areas? The answers aren’t easy to come by, and no one seems to agree.

Bank of America debt collectors are one of the most fearsome authorities on debt in the industry. Whereas most other banks sell off debt to a third party (which will then try to collect on its own), Bank of America does this dirty work itself. And considering how easy it is to obtain a loan from the bank, this is a common practice. It’s not at all unusual for the bank to find itself in the court for harassment — or to take a debtor to court on its own.

Is it fair that they have the power to do this? Isn’t it their fault for giving loans to people who can’t repay?

The pandemic has put a new spin on the issues at hand. In the earlier months, federal watchdogs allowed banks to exempt U.S. government bonds that were previously treated as assets. That was a measure that was taken to make it less likely that Wall Street would face tremors in the early days — while ensuring that banks would continue to provide loans or credit to individuals, households, and small businesses.

Head of research at Pepperstone, Christ Weston, said, “If the SLR is not extended, the concern is we’ll see financial institutions dump a chunk of their U.S. Treasury exposure, which would see yields spike and send short-term shock waves through markets.”

For better or worse, the pandemic has relaxed the urgency to regulate big banks — and even increased the risk that future actions will result in economic turmoil. 

FX macro strategist John Velis said, “The Fed has punted on the SLR extension question so far, but again, we will be looking at the press conference — to see if Powell is pushed on this and what his attitude is.”

Senators Elizabeth Warren and Sherrod Brown predictably said that SLR exemption extension would be a big mistake, and that now was the time to increase regulation — not eliminate it altogether. 

Bankers have already realized the uncertainty in the future. Primary broker-dealer holdings at U.S. banks recently experienced a weekly decline that broke records. U.S. government bond holdings fell to a low of $185.8 billion. This could be a sign of serious trouble — but no one knows for sure, and we don’t know if it’s short-term or long-term.

Economist Lauren Goodwin said, “For most investors, this is potentially a cause of market indigestion, not a major risk to positioning.”