The mantra of the Republican Party, thanks to funding by organizations like ALEC and the Chamber of Commerce, is that any regulation on business is bad. They’ve been successful in framing this issue so that the low information voter thinks that regulations on business compromise individual freedoms. Fortunately this belief seems to be waning, as demonstrated by the ongoing and increasing protest on Wall Street.
I was recently involved in an online discussion about regulation in the finance industry. Those on the right were saying that there will be increased bank failures thanks to regulation by the FDIC and the Dodd Frank bill. That claim is blatantly false. But people like Rep. Scott Tipton have swallowed the Kool-Aid, as demonstrated by his “Jobs” bill to allow banks to recognize losses over a seven-year period, instead of when discovered, thus hiding losses in equity.
Banking regulations, in commercial banks, are designed to protect the depositor’s money. If the bank is getting too leveraged, regulators issue a memorandum of understanding detailing the weaknesses they found in an examination, and requiring management to take corrective action. The regulator issues a report of findings and assigns a CAMELS rating. C = Capital adequacy. A = Asset quality. M = Management. E = Earnings. L = Liquidity. S = Sensitivity.
As a correspondent banker, I’ve read many examination reports from banking regulators. If bad loans are increasing, or banks are growing too fast one of the required corrective actions is to raise more capital. If a bank fails to raise that capital in a reasonable amount of time, the bank is shut down. Regulators try to sell the assets and liabilities of the failed bank to another bank, but when they can’t find a buyer the FDIC pays off depositors up to $250,000, but not other creditors. What some people forget is that FDIC gets its funds from premiums assessed on all insured banks. If losses go up, the premiums go up for all the remaining banks.
It seems odd to think of anyone buying the liabilities of a bank, but those liabilities are primarily customer deposits, which is cheap money compared to any other source of funding for bank operations. The bank can collect fees and service charges, and pay zero interest on that money.
Banks don’t fail because of regulations. Banks usually fail because of bad management. There is a story about bank failures linked in the Homework that tells the real story. It describes how the FDIC required failing Colorado banks to raise more money, then closed them when they could not do so. The FDIC is not the problem; regulation is not the problem; bad management is the problem. (And Tipton’s Jobs plan that allows banks to hide losses in equity is a way for bad management to continue being bad managers, potentially increasing the risk of failure.)
Homework
Occupy Wall Street
Dodd Frank Bill
CAMELS ratings
FDIC Gets No Taxpayer Money
Recent Colorado Bank Failures
I was recently involved in an online discussion about regulation in the finance industry. Those on the right were saying that there will be increased bank failures thanks to regulation by the FDIC and the Dodd Frank bill. That claim is blatantly false. But people like Rep. Scott Tipton have swallowed the Kool-Aid, as demonstrated by his “Jobs” bill to allow banks to recognize losses over a seven-year period, instead of when discovered, thus hiding losses in equity.
Banking regulations, in commercial banks, are designed to protect the depositor’s money. If the bank is getting too leveraged, regulators issue a memorandum of understanding detailing the weaknesses they found in an examination, and requiring management to take corrective action. The regulator issues a report of findings and assigns a CAMELS rating. C = Capital adequacy. A = Asset quality. M = Management. E = Earnings. L = Liquidity. S = Sensitivity.
As a correspondent banker, I’ve read many examination reports from banking regulators. If bad loans are increasing, or banks are growing too fast one of the required corrective actions is to raise more capital. If a bank fails to raise that capital in a reasonable amount of time, the bank is shut down. Regulators try to sell the assets and liabilities of the failed bank to another bank, but when they can’t find a buyer the FDIC pays off depositors up to $250,000, but not other creditors. What some people forget is that FDIC gets its funds from premiums assessed on all insured banks. If losses go up, the premiums go up for all the remaining banks.
It seems odd to think of anyone buying the liabilities of a bank, but those liabilities are primarily customer deposits, which is cheap money compared to any other source of funding for bank operations. The bank can collect fees and service charges, and pay zero interest on that money.
Banks don’t fail because of regulations. Banks usually fail because of bad management. There is a story about bank failures linked in the Homework that tells the real story. It describes how the FDIC required failing Colorado banks to raise more money, then closed them when they could not do so. The FDIC is not the problem; regulation is not the problem; bad management is the problem. (And Tipton’s Jobs plan that allows banks to hide losses in equity is a way for bad management to continue being bad managers, potentially increasing the risk of failure.)
Homework
Occupy Wall Street
Dodd Frank Bill
CAMELS ratings
FDIC Gets No Taxpayer Money
Recent Colorado Bank Failures
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