Posts Tagged ‘banking’

At a recent event, Senator Elizabeth Warren described postal banking as a triple win for the government, public and postal service. For the public it could be an essential new route to provide basic banking services to rural areas and inner cities.

One in four households are estimated to be underbanked – with high proportions of those under the age of 25 and in black or Hispanic communities. Basic banking services like ATM access, check-cashing, and small-scale lending could save these underbanked households $2,412 each year.

The underbanked are also most vulnerable to the practices of predatory financial service providers – nearly half of Americans would have to borrow money should they have a financial emergency that cost over $400. That’s the equivalent of an emergency room visit or a car accident. This has led to fringe lenders in the U.S. outnumbering McDonalds and Starbucks.

The poorest American families have been faced with exacerbated charges on their earned income while the majority of bank closures happen in the areas they live, the areas that are the most in need.

Even community banks and (in some cases) credit unions, which once existed to serve the underbanked, can be bogged down with account fees and the cost of staying open that make it impossible for lower income clients to continue banking there.

Postal banking is a rational solution to the many problems faced by the chronically underbanked, according to the book How the Other Half Banks, by Mehrsa Baradaran, who also spoke at the event.

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Most people only think about bank runs around the winter holidays when “It’s a Wonderful Life” plays incessantly on television and the protagonist is trying to save his small community bank from going under. Bank runs are an old-fashioned idea, the stuff of black and white movies and not the sort of issue we tend to think of as a problem for this century.

Since the advent of the Federal Deposit Insurance Corporation (FDIC) in 1933, our deposits are protected and we don’t need to worry about banks running out of money.

Or do we?

When banks are allowed to take bets on toxic debt or enter into complex derivatives transactions – essentially gambling with our taxpayer-insured deposits — we may be setting up our economy for another meltdown. Banks can and do lose huge sums of money on failed bets, as happened with several leading banks in the run up to the 2008 crash. These bad bets were part of what caused many financial institutions to fail; the failures set off the chain reaction of the economic crash. Instead of paying back depositors and simply allowing the banks to go under, the government chose to bail out some of them, leading to trillions in payouts under the Troubled Asset Relief Program (TARP) and other bank supports.

They say hindsight is 20-20, but our country’s leaders should have known better then to allow this gambling. For most of the last century, we had strong, clear protections against just that type of bank activity. President Franklin D. Roosevelt and Congress included a ban on riskier investment banking (read gambling) by FDIC-insured facilities when the system of federally-insured deposits went into effect in 1933. This ban between commercial and investment banking was called the Glass-Steagall Act, and it was rolled in with the Banking Act of 1933, which also created the FDIC.

This safety glass was in place for over 50 years and served the country well as we experienced overall stability in the financial industry. But banks desiring to engage in high-risk, high-profit transactions pressured Congress to break down the wall. The Glass-Steagall Act was repealed in 1999 through President Clinton’s signing of the Gramm-Leach-Bliley Act.

After Glass-Steagall’s repeal, commercial banks backed by FDIC guarantees borrowed cheap money and jumped full force into packaging debt, underwriting mortgages and growing their investment strategies. They took bigger risks than ever before, leading us straight to the crisis. Over-leveraged and under-capitalized, the banks’ gambling strategies blew up.

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In December 2012, federal prosecutors failed to bring true justice to HSBC for massive, criminal money laundering because the giant UK bank was too big. An indictment, they thought, would ravage the financial sector.

In January 2013, with a full month to reflect about the non-prosecution of HSBC, Attorney General Eric Holder acknowledged the reason behind the decision: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large.”

Since then, numerous bank regulators and Obama administration officials have attempted to refute their role in or even the accuracy of Holder’s assertion.  In testimony and speeches, officials from the Federal Reserve, FDIC, Comptroller of the Currency, and Treasury contradicted Holder’s claim that government deemed  some banks were just too big to jail.  Those denials may be explored when Justice Department official James M. Cole testifies before a House financial services subcommittee May 22.

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"Bart Naylor" "Financial policy reform"With a simple albeit ambitious decision, Wall Street regulators have a way to all but guarantee that there will be no more financial sector bailouts: require substantial at-risk equity investment.

On Monday, October 22, federal banking regulators will close the public comment period for proposed reforms of so-called capital requirements. Capital rules are the shorthand for the proportional amount of shareholder money that banks must add to any of its loans and other activities. This money joins borrowed money from depositors and other creditors to the bank. Together, stockholder and depositor money is loaned to businesses, home buyers, and other bank clients. If a client can’t repay the whole loan, that loss should come out of the pocket of the stock investor, not the depositor or taxpayer.

Going into the financial crisis, large banks had effectively loaned out $33 for every $1 in stockholder money. When the housing bubble burst, when complex special purpose vehicles exploded, when speculation deals vaporized, that $1 in shareholder investment was not nearly enough to keep these large banks solvent. American taxpayers were forced to invest $700 billion into bank capital accounts through the bailout, with the Federal Reserve shoveling trillions more in cheap credit for the banks.

In order to avoid a repeat of this disaster, the required investment from shareholders must be substantially increased.

Federal bank regulators now propose to improve the capital rules, as part of harmonizing with an accord negotiated in Basel, Switzerland. The regulators’ proposal spans 1,000 pages. The text contains more mathematical formulas than a calculus textbook. By comparison, the Volcker Rule, designed to terminate high risk bank speculation and much maligned for its complexity, is a Reader’s Digest at 300 pages.

These 1,000 of pages represent a lot of trees, both literally and figuratively, but the regulators fail to evince a view of the forest. Most problematic, the regulators essentially leave basic capital levels untouched, at about the same 33-1 level that prevailed during the crash. That upsets leading Washington policy-makers, both Republican and Democrat.

On Oct. 17, Sens. Sherrod Brown (D-Ohio), and David Vitter (R-La.) fired a letter to the regulators declaring that capital requirements must be strengthened. There is “bipartisan consensus among members of the Senate Banking Committee that it is appropriate to require banks to fund themselves with equity sufficient to withstand sufficient economic shocks,” the senators wrote.

Earlier this month, two dozen former regulators, both Republican and Democrat, led by former FDIC Chair Sheila Bair, and Federal Reserve Chairman Paul Volcker called for investor capital equal to 16 percent of the bank’s activities. Sitting FDIC Vice Chair Thomas Hoenig agrees that capital should be substantially higher than currently proposed. Other experts, such as MIT economist Simon Johnson and Stanford professor Anat Admati, call for 20 percent at-risk investment. Admati emphasizes that high capital won’t sit idly in a cookie jar, such as a rainy day fund. Other firms finance themselves entirely with at-risk equity capital, such as the computer company, Apple Inc.

With sound capital, the regulators can dispense with the second major problem with their proposal, namely risk-weighting. This counterproductive exercise allows banks to hold less capital for some activity. If implemented, JP Morgan would need less investor capital for a loan to a faltering big bank like Bank of America than a loan to a profitable, growing company like Apple Inc. Absurd.

The risk-weighting rules are complex, a “tower of Basel,” according to Bank of England director Andrew Haldane. In effect, the weights become “central planners’ determination of risks, which creates its own adverse incentives for banks making asset choices,” according to the FDIC’s Hoenig.

Banks want simplicity? Here you go: In Public Citizen’s comment letter, we call for a strict capital requirement of 20 percent, with no hall passes for risk weighting.

Bartlett Naylor is Public Citizen’s financial advocate. Follow him on Twitter @BartNaylor.

"Bart Naylor" "Financial policy reform"Four years ago this month, the world’s financial sector exploded, shooting shrapnel through the economy. Wounds fester to this day.

Last year this month, public outrage at Wall Street and general corporate corruption exploded in the form of the Occupy Wall Street movement. Benefits abound.

Defying easy definition, with no leadership structure, no official spokesperson, no office, not even a proverbial mission statement, “Occupations” rapidly proliferated through the United States and overseas. And the accomplishments of this otherwise amorphous energy have been concrete and sweeping. Here are a just a few:

  • OWS unburied from overlooked economics studies and made common knowledge the harsh reality of income inequality. “We are the 99 percent,” declared this movement. Among the alarming statistics: The wealthiest 400 Americans have more savings that half the entire national population.
  • Sniffed at by some for unformed/nebulous views, the OccupyTheSEC group penned an authoritative 300-page analysis of the complex Wall Street Reform Act Volcker Rule. While Wall Street’s high paid lawyers publicly complained about the rule’s difficulty, this Occupy group, composed of former derivative traders surgically dissected each detail of the federal proposal, identifying strength and weaknesses. Since then, senior staff at Washington regulatory agencies have consulted these Occupy experts.
  • Oppressed American workers, including those in beleaguered unions, drew energy from Occupy help. In New York City, for example, Occupy protestors joined in a symbolic 99 picket lines at work sites and banks. Occupy’s support for Con-Edison workers in New York locked out of their resulted in reciprocal support for specific OWS actions.
  • OWS increased attention to the corruption of corporate money in politics. Occupy proved important in approval of the STOCK Act, making members of Congress subject to the same anti-insider trading laws as average Americans. Occupy drew attention to the Supreme Court’s decision in “Citizens United” that reduced restrictions on corporate spending. That resulted in further support for the DISCLOSE Act as well as a constitutional amendment to reverse the court’s decision.

Movement or moment? Traditional conflict has supplanted OWS in the media, namely political elections. But self-identified Occupy members remain vigilant. The OccupyTheSEC gang, as noted, has continued its expert efforts on a widening front. But just as communication revolutionizes yearly (email, social networking, Twitter, livestreaming), it may be impossible to track the trajectory of Occupy. Rather, Occupy may be shattering such distinctions as movement and moment. This non-organization organization Occupy, may, in fact, be a verb.

Bartlett Naylor is Public Citizen’s financial policy advocate. Check out his piece, “Wall Street and the Cost of Forgetting” and follow him on Twitter @BartNaylor.

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