The Federal Reserve’s point man on overseeing the banking industry on Monday questioned the benefit of reinstating a Depression-era law that would separate commercial and investment banking activities — an idea being championed by Sens. Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.).
Last week the senators introduced what they are calling a modern day Glass-Steagall Act, arguing that Wall Street banks still pose a threat to the economy and taxpayers because they take too many risks risks and that the banking business should return to its “boring” roots.
Fed Gov. Daniel Tarullo said Monday that the repeal of Glass-Steagall in 1999 was not a major factor in the 2008 financial crisis and that putting it back in place would not necessarily address the current threats to the financial system, such as banks’ reliance on volatile short-term funding markets.
“There’s some question as to how much that separation would actually prevent the kind of problems we saw from developing,” Tarullo said at POLITICO’s Morning Money Breakfast Briefing in reference to financial institutions that ran into trouble during the financial crisis.
The repeal of Glass-Steagall has been seized upon by reform advocates as a moment when Wall Street deregulation went too far and the era of excessive risk taking that led to the 2008 financial crisis began in earnest.
The banking industry and some regulators have pushed back against this argument noting that the financial institutions that fared worst during the financial crisis — such as Lehman Brothers and Bear Stearns — were investment banks that didn’t have big commercial banking operations.
Warren last year campaigned on the idea of breaking apart banks’ commercial and investment banking activities, arguing if Wall Street banks want to make risky bets in financial markets, they should not be able to do so while still receiving a government backstop for their more traditional deposit-taking businesses.
Last week when the bill was introduced, Warren told reporters that a return to Glass-Steagall was just one piece of what should be done to further crack down on big banks.
“It will stop the game that these banks have played for far too long,” she added.
The bill would close loopholes and update Glass-Steagall by excluding new instruments, like complex derivatives and swaps, from traditional commercial banking, Warren said. She acknowledged that the bill by itself would not end too big to fail, but said it would make financial institutions smaller and safer by separating depository institutions from riskier activities.
Warren even has a slogan for the bill — “Banking should be boring” — and a website urging visitors to sign their names in support of the bill.
“Americans want safe banks,” she said. “The banks that handle their checking accounts, their savings accounts should be rock solid secure. And they should not be juicing their profits by taking those insured deposits and betting them in wild financial schemes.”
Tarullo also said Monday that while significant steps have been taken in recent years to make the financial system more stable, including requiring big banks to meet tougher capital standards, there are still areas that need to be addressed.
“My own view is that we still do need to do more to get to the point at which the risks posed by some of these institutions are confined to what we would think of manageable proportions,” Tarullo said.
Tarullo said at the top of the list should be putting in place reforms for short-term funding markets.
The 2010 Dodd-Frank Act is nearing its three year anniversary and several major rules required by the law have not been completed.
The law requires several agencies to collaborate on major new rules, such as the trading restrictions known as the Volcker rule, and Tarullo said that has contributed to the length it has taken to put new policies in place.
“I think it’s a little early to judge this but I think it’s undeniable that this feature of Dodd-Frank is part of what has slowed down the rulemaking process,” Tarullo said.
He added that time will tell whether this collaboration will lead to better results.
“I think people have gone out their way to try and be cooperative … because everyone understands the novelty of the situation and the sheer magnitude of it,” Tarullo said.
He also defended a new proposal unveiled by bank regulators last week that would double the leverage ratio required for the eight biggest U.S. banks, noting that the international capital agreement, known as Basel III, set a floor, not a ceiling for what countries that signed onto the agreement could put in place.
“There’s nothing that says that national authorities cannot make a judgment that they want more,” he said.
The leverage ratio requires banks to fund themselves with more equity and rely less on debt to fund their loans and other assets so they can withstand a greater amount of losses.
The industry has raised concerns that the proposal goes too far beyond what was agreed to under Basel III, and could put U.S. banks at a competitive disadvantage. But Tarullo said he does not think global harmonization of capital rules is as important as harmonizing other reforms being put in place, such as margin requirements for derivatives transactions, in response to the 2008 financial crisis.
“I don’t think that’s necessary in the capital area,” he said, noting that regulators in other countries continue to consider further efforts to boost capital, and have asked the Fed for more details on its leverage proposal.
“I think there is interest that people are showing in additional measures,” Tarullo added.
http://www.politico.com/story/2013/07/daniel-tarullo-glass-steagall-94155.html
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