Robert Wilmers, CEO of M&T Bank, addressed the American Banking Symposium earlier this week and expressed his fears over the shortcomings of the Dodd-Frank financial reform bill. He believes the new regulations make it harder for traditional banks to do business, and do little to address the primary causes of the 2008 collapse.
The three problem areas left unaddressed by the massive bill include problems with the ratings agencies, Fannie Mae and Freddie Mac, and speculative investment that goes on at our biggest banks. The last of these three is the most fascinating for our purposes.
Wilmers points out that “[t]rading revenue at the six largest U.S. banks represented 91 percent of such revenues of all American banks in 2010.” Bigger banks engage in much more speculative, risky trading than they used to, instead of engaging in the “prudent extension of credit that furthers commerce.”
Small Banks Pay FDIC to Protect Big Banks
Worse still, he argued, the FDIC — which is supposed to protect depositors — exists now to protect speculators, as these large banks that engage in risky behavior have the full backing of the agency. As if to counter Wilemers’ point, Moody’s downgraded three big banks’ credit ratings due to fears that the FDIC would let bondholders take a loss in the event of failure at those institutions.
At the same time, new FDIC regulations make it more difficult for smaller banks that primarily earn revenue through traditional banking practices — like M&T, for example — to extend credit to customers because their FDIC contributions are much higher than they were in the past, and they have higher capital requirements. These two new rules “[divert] capital that might otherwise be helpful in extending credit to our struggling economy.”
Wilmers went on, “Simply put, Dodd-Frank, rather than beginning the necessary process of changing the model for bank holding companies said to be too big to fail, has acquiesced in the perpetuation of their problematic business model and linked the fortune of traditional banks with their fate.”
One typically hears anti-Dodd-Frank rhetoric from free market hawks who likely see nothing wrong with banks engaging in risky speculation, or letting banks fail. It’s troubling to hear such a compelling argument that the new regulations hurt banks that do more to help people save and expand the economy.