Experts fear for the next crash
7 March 2018
By Moritz Koch and Yasmin Osman
[NOTE: This article was published by the German newspaper Handelsblatt here on 7 March. The translation is from Americans for Financial Reform.]
Berlin, Frankfurt — There are many urgent topics that could be dealt with by the US Senate: the lax weapon law, for example, which leads to tens of thousands of deaths each year. Or the opioid epidemic that hit the middle class, especially in rural America. But the Republican majority has found other priorities.
Republicans are pushing legislation to ease rules on the financial services industry. In the next few days, the law — the Economic Growth, Regulatory Relief, and Consumer Protection Act, in the political jargon of the US capital shortly (S. 2155) — could be adopted.
Almost exactly ten years ago, with the collapse of investment bank Bear Stearns, the financial crisis began, and the global economy plunged into the worst recession since the 1930s. The trigger for many observers was too-weak regulation of the financial industry.
Therefore, the G20 countries agreed to strengthen the supervision of the global banking sector. The big banks adapted to the new circumstances and adapted their business models. US banks at least were able to generate record profits again despite the additional rules.
With their plans to ease controls, Americans could now trigger a transatlantic deregulation race, cecause the regulatory change of heart in Washington threatens to draw imitators on the other side of the Atlantic.
“The US has pioneered stricter capital requirements in recent years,” said Jan Pieter Krahnen, a finance professor at Frankfurt’s Goethe University. “This leadership is now gone — and that will also have consequences for banking regulation in Europe.”
The Europeans, especially the Germans, have always been in favor of less stringent capital regulations in international negotiations. “Now the freedom of the Europeans to loosen up their regulatory requirements is growing,” Krahnen said. One could already observe that capital regulations would be relaxed, even if nobody said so openly.
The “wise economist” [i.e. a member of the German government’s official council of economic advisers] Isabel Schnabel sees the similar: “Deregulation in the US feeds the demand for deregulation in Europe.” In economically good times, it would be particularly difficult to defy such demands, because the existing risks were barely visible. “European politics should not be pressured by developments in the US and denounce deregulation efforts,” she says.
Resistance also in the USA.
In the US, the relief plans for the banks meet with resistance. And not just because critics fear Wall Street’s relapse into the carefree pre-crisis era. The US deregulation opponents also warn that major foreign banks could be among the main profiteers — and especially the notorious Deutsche Bank in the US.
This bank has played a key role in the financial crisis. Germany’s largest financial institution was deeply involved in the machinations on the real estate market through its US arm and had to pay billions of fines. In addition, the Frankfurt-based banking group in Washington is considered the banker of US President Donald Trump.
The controversy explosive for other reasons. “The Deutsche Bank is basically the only bank that lends money to President Trump after his many bankruptcies,” emphasizes the Democratic Senator Sherrod Brown, who has become the spokesman for deregulation opponents.
The very impression that relieving it could be a political favor is detrimental to Deutsche Bank.
However, central passages of the bill are unclear. The extent to which the discharge for Deutsche Bank and other international financial groups will actually turn out is open.
The Republicans have been complaining for years about allegedly anti-cyclical conditions imposed on the financial sector. In opposition, they fiercely opposed the reform laws of former President Barack Obama. Now that they have a majority in the Senate and the House of Representatives, and with Trump in the White House, the Republicans see their opportunity.
The conservative senators have secured the support of several moderate Democrats whose votes are needed to break the blocking minority of deregulation opponents.
Consumer advocates are raising alarm: The amendment “would severely weaken the oversight of the US subsidiaries of many large, global banks,” said Marcus Stanley, political director of the Americans for Financial Reform organization, which campaigns for vigilance in financial supervision.
The liberal think tank New America criticizes the legislative package as a “gift for corporations”. Once put into effect, it would make the US financial system “more vulnerable to a new financial crisis and potentially lead taxpayers to rescue banks again.”
The authors of the bill vehemently deny that they are trying to relieve large financial groups. They are all about smaller regional banks, which are overwhelmed by the requirements of the regulatory authorities. The requirements for risk management and the preparation of resolution plans should be softened, and capital and liquidity regulations would be relaxed. The proponents of deregulation hope that the flow of credit in rural areas will improve and that the recovery of the US economy will reach the Heartland more than before.
However, the legal text goes far beyond this goal. Critics point out that the threshold, from which banks are considered particularly in need of regulation, is raised from a balance sheet total of $50 billion to $250 billion. This would result in 25 of the 38 largest US banks no longer falling under some of the tightened rules of the Obama reform.
It is disputed whether this reclassification also applies to the corporate subsidiaries of international financial groups. The US arm of Deutsche Bank, Deutsche Bank Securities, has a balance sheet of $ 150 billion, so would fall below the new threshold. Finance Minister Steve Mnuchin confirmed this at a Senate hearing in January.
Recently, however, the new head of the Federal Reserve, Jerome Powell, hinted that there would be no changes for the daughters of foreign corporations.
Doubt about relief
The Deutsche Bank will not comment on the issue, but in financial circles the statements of Powell have raised doubts about whether foreign banks will get a break. The goal for the reform is to relieve US banks of regulations. Numbers on the possible effects one way or another are lacking too many details. If the bill passes the Senate and then the House of Representatives, it is considered certain that President Trump will sign it. Since joining the White House, unlike during the election campaign, when he hounded Hillary Clinton for allegedly being a puppet of Wall Street, he has pushed ahead with an extensive deregulation agenda.
All this is also fueling concern of Jakob von Weizsäcker, a Social Democratic member of the European Parliament, that regulation could soon be reversed in Europe. “I see alarm signals,” he warned at a bank meeting in Frankfurt. In the EU, there are forces that want to relax the rules that legislators use to protect taxpayers from bankruptcy costs. Actually, the EU has long since agreed on the extent to which owners and creditors of banks must at least be liable before taxpayers’ money is allowed to flow.
Now, however, proposals come from the EU Commission not to take these lower limits too seriously. In addition, the situation is exacerbated by the EU’s exit from the UK: Brexit will reinforce the deregulation wave, “if we don’t watch the hell out,” warned von Weizsäcker.
“Never again” — that was the oath after the financial crisis. Not ten years later, the lessons of the big crash seem to be forgotten.
