More than five years ago, the 2,300 page financial overhaul known as Dodd-Frank was signed into law. While Congress was debating Dodd-Frank, it became clear that the law would be more of a political exercise than an attempt to identify and address the root causes of the 2008 financial crisis. Since its enactment, the negative impacts of Dodd-Frank on our regulatory structure, our financial system, and our economy have become clear. It is now time to fix what is broken.
Although the Obama Administration and many congressional Democrats view Dodd-Frank as untouchable, I believe that the status quo is unacceptable. That is why, as Chairman of the Senate Banking Committee, I have promoted commonsense reforms to tackle the troubles with Dodd-Frank head-on. TheFinancial Regulatory Improvement Act, which I authored and has been approved by the Banking Committee, provides much-needed regulatory relief for community banks and credit unions and takes steps to allow financial institutions to reduce systemic risk, among other measures.
Our financial institutions help fuel the economic engine that drives a cycle of prosperity that is uniquely American. Towns and cities in Alabama and across the country thrive when banks and other institutions provide loans to finance home ownership, private consumption, and business development. A strong, vibrant financial system is an absolutely essential precursor to a strong and vibrant economy.
Although Dodd-Frank was touted by its Democrat advocates as "Wall Street reform," the law has put in place a structure where Main Street banks and other financial companies that had nothing to do with the crisis are being treated as if they caused it. Taking deposits and making good loans to local consumers used to be the hallmark of community banking. Now it is sifting through thousands of pages of the Federal Register to find out whether a simple loan will get you crosswise with a federal regulator.
It goes without saying that these institutions – like the more than 150 community banks currently operating in Alabama – provide vital support to local economies, including the role they play in small business lending. That is why my legislation provides regulatory relief for community financial institutions that have been smothered with excessive regulations since the passage of Dodd-Frank. While some regulation is appropriate, we must ensure that the restrictions are no greater than what is required to ensure the safety and soundness of our financial institutions. We must keep in mind when making regulatory decisions that every dollar spent on unnecessary compliance costs is one less dollar available to support lending.
Another segment of the banking industry that has been hit by disproportionate regulations is regional banks. Dodd-Frank established a new regulatory framework and imposes heightened standards on companies deemed systemically risky by the Financial Stability Oversight Council, a board comprised of the President's appointed officials. Regional banks have been placed in a regulatory framework designed for much larger and riskier institutions without any consideration of whether they are actually systemically risky.
There are several flaws with the notion that this new system is the correct approach. First, the effectiveness of the FSOC is premised on the idea that the same regulators who failed to foresee the last financial crisis will be able to predict and prevent the next crisis. Unlikely. Second, the designation of "systemically important" serves as a signal to markets, shareholders, customers, and perhaps even management that these entities are in a protected category by being so large and significant to the economy that they will be bailed out by the federal government. I have long been a vocal advocate against any commercial institution, financial or otherwise, being too-big-to-fail.
Additionally, a complex Wall Street bank with trillions of dollars in exposures poses far more systemic risk compared to a significantly smaller regional bank with a traditional banking business model. It is a mistake to assume that these companies would fare similarly in a financial crisis. Therefore, applying one-size-fits-all regulations is also misguided.
Giving companies an opportunity to reduce systemic risk is more likely to result in a resilient financial system than labeling those companies as systemically important and saddling them with additional regulatory requirements. The former enables risk to dissipate; the latter institutionalizes the risk by keeping it in the system.
To address this issue, the Financial Regulatory Improvement Act requires the FSOC to explain what makes financial companies risky and to create incentives for companies to shed risk. FSOC would retain the ability to label a company systemically important and would provide input to companies on how best to reduce risk, but would not automatically designate a bank as systemically risky based on an arbitrary size threshold. The current Administration opposes any such changes, which means they would rather regulate riskier institutions than help institutions become less risky. That does not make any sense.
For too long, we have witnessed the "regulate first, ask questions later" approach. It is long past time to identify and reverse the regulatory burdens that weaken our economy. It has become clear over the past several months that this will not be an easy undertaking, but I am committed to fighting for these reasonable, needed reforms to strengthen our financial system and stimulate economic growth.