Assessing Clinton's Bank Reforms

The Public Banking Institute does not endorse, nor discourage the endorsement of, any particular candidates for public office. What we do instead is evaluate the individual policies of myriad candidates. We know that banking reform is a top priority of the two leading Democratic candidates. Hillary Clinton is rightly perceived to be a few degrees less radical than Bernie Sanders in her approach to banks. She would not restore Glass Steagall, nor would she proactively break up the big banks. What would she do? 

(And before political junkies cry foul, yes, I'll discuss Sanders's banking policy proposals next week. Believe it or not, when we say we're nonpartisan, we really mean it.)

WallStreet.jpgIt's certainly not accurate to say that Clinton doesn't want to do anything to regulate the big banks or the financial industry. It is accurate to say her proposals are modest--not in the ironic sense of Jonathan Swift's modest proposal, but truly modest. Clinton wants to tax SOME high-frequency traders, but is not in favor of an all-out financial transaction tax. She would also enhance the Volcker rule, disallowing banks to invest up to 3% of their capital in hedge funds. Clinton believes that encourages risky behavior.

But one particular aspect of her banking proposals deserves a closer look, because even Clinton's most vehement critics admit it's not a bad idea--at least within the current "Wall Street should still be in control of America's finance" paradigm--an undesirable paradigm, to be sure, but the one that we're stuck in absent a widespread push for public banking.

Under the proposal, Clinton would charge a yearly "risk fee" on a sliding scale on the liabilities of banks with more than $50 billion in assets along with other institutions overseen by financial regulators, the campaign said.The fee would be higher for firms with greater amounts of debt and those that engage in riskier trading, it said. It would not apply to insured deposits and would have no impact on traditional banking activities, it said.

The Wall Street Journal explains:

The new fee, designed to curb risk-taking not otherwise constrained by regulations, would hit all banks with assets of more than $50 billion, including J.P. Morgan Chase & Co., Citigroup Inc. and Bank of America Corp. The fee would also hit financial firms that regulators deem risky, such as insurer American International Group Inc., and would be tailored to punish firms with high levels of debt or volatile, short-term funding.

Matthew Yglesias of Vox, one of Clinton's most vocal journalistic fanboys, provides the best details of the plan:

The fee would be assessed on banks with more than $50 billion in assets (34 banks fit the bill as of today, though two of them are very close to the line) as well as on a handful of other institutions that the government has already flagged for extra regulatory scrutiny. The fee rate would be higher on short-term debt than on long-term debt. The fee rate would be higher on banks with more debt in their financing structure. FDIC-insured bank deposits would be exempt from the fee.

Clinton also goes beyond the current incarnation of Dodd-Frank according, again, to the Wall Street Journal assessment

In addition to the risk fee, Mrs. Clinton said she would address the “too-big-to-fail” concerns by asking regulators to impose higher capital requirements on firms if necessary and seeking more legal authority for them to force restructuring of a financial firm if they judge that it can’t “be managed effectively.”That would go beyond the 2010 Dodd-Frank law, the centerpiece of the government’s response to the financial crisis, which gave regulators limited power to break up financial firms.

Absent the fee proposals, Clinton's plan ain't all that. As James Kwak, writing for The Atlantic, pointed out on the same day last October that Yglesias posted his gushing praise of the plan,

Unfortunately, there’s less here than meets the eye. The Federal Reserve and the Financial Stability Oversight Council can already force a large financial institution to scale back its operations if it poses a grave risk to the financial system. (That’s the Kanjorski Amendment, or Section 121 of the Dodd-Frank Act). And per Dodd-Frank, regulators also have the power to make life difficult for systemically important financial institutions in all sorts of ways—they can impose capital requirements, leverage limits, liquidity requirements, disclosures, or short-term debt limits. (For the most part, though, these tools haven’t been widely used.) In short, when it comes to too-big-to-fail banks, Clinton is proposing very little beyond what currently exists—nor does she explain how she will get regulators to use the powers they already have.

But Kwak and other critics don't assess the "risk fees," and one banker friend of mine, who is critical of the industry, believes that if the fees are large enough, they could lead to voluntary breakups of large banks. So there's something mildly impressive about the fees--and that's about it. The bigger problems with Clinton's plan are systemic, not contingent, in nature, as Stephen Maher of Jacobin explained in January of this year:

In presenting the plan as an attack on the power of finance, Clinton portrays the problem as one of discouraging the speculative and short-term profits that supposedly come at the expense of longer-term sustainable growth and prosperity. . . .

while Clinton’s plan to impose a “risk fee” on the largest banks is certainly welcome, it also reinforces the independence of banks by using market incentives rather than public policy to prevent banks from growing beyond a certain size. This is emphatically not a call to break up the banks, despite Clinton’s assertion that the federal government should have the tools to do so.

In sum, given a paradigm that entrusts finance and the arbitration of monetarism to private entities, Clinton's risk fees, in particular, are better than the status quo--better than Obama's regulatory approach, and certainly better than what the big banks themselves would do.

But we at the Public Banking Institute, along with many other organizations and individuals, believe that the biggest problem with an economy controlled by big private banks is the unnecessary domination of private finance capital--with its gargantuan and destructive interest rates, its obsession with feeding massive profits to shareholders, and its periodic gutting of public treasuries and the public good. We know that alternatives to this dominance--public banks--are already in place in North Dakota and in other countries. Placing such an alternative on the agenda of American political parties and leaders will require our continued agitation.

As a short afterword: One of the reasons I'm happy to speak for a 501(c)(3) is precisely because I get to avoid the blowhardness of the 2016 election season, at least during my work hours. I was reminded again just how toxic the Democratic primary had gotten when I saw a few people sharing this particular gem--Isaac Chotiner's sloppy and uncritical Slate interview "Barney Frank is Not Impressed by Bernie Sanders." I was less impressed by the article than Frank is with Sanders--particularly because Frank holds himself out to be the author of what he considers to be successful financial reform legislation, and Dodd-Frank has been anything but. As Ellen Brown writes:

Dodd-Frank's "orderly liquidation authority" has replaced bailouts with bail-ins, meaning that in the event of insolvency, big banks are to recapitalize themselves with the savings of their creditors and depositors. The banks deemed too big are more than 30% bigger than before the Act was passed in 2010, and 80% bigger than before the banking crisis of 2008. The six largest US financial institutions now have assets of some $10 trillion, amounting to almost 60% of GDP; and they control nearly 50% of all bank deposits.

Meanwhile, their smaller competitors are struggling to survive. Community banks and credit unions are disappearing at the rate of one a day. Access to local banking services is disappearing along with them. Small and medium-size businesses - the ones that hire two-thirds of new employees - are having trouble getting loans; students are struggling with sky-high interest rates; homeowners have been replaced by hedge funds acting as absentee landlords; and bank fees are up, increasing the rolls of the unbanked and underbanked, and driving them into the predatory arms of payday lenders.
The rapid demise of community banking is blamed largely on Dodd-Frank's massively complex rules and onerous capitalization requirements. Just doing the paperwork requires an army of compliance officers, and increased capital and loan requirements are eliminating the smaller banks' profit margins. They have little recourse but to sell to the larger banks, which have large staffs capable of dealing with the regulations, and which skirt the capital requirements by parking assets in off-balance-sheet vehicles.

The real answer, a better answer than Clinton, or even Sanders, offers (and certainly better than Dodd-Frank) is that banking needs to be a public utility, not a shareholder profit venture.

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