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The roll-back of Dodd-Frank reforms should raise the USA's risk profile

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Author: 
Editorial Staff

As the US bill to roll-back the Dodd-Frank reforms that were designed, amongst other things, to stabilise banks to protect them from failure is sent to the President, who promoted it, for signature, BankingInsuranceSecurities.com points out one statistic that might indicate how successful Dodd-Frank has been and why the changes increase the USA's risk profile.

During the height of the Global Financial Crisis which largely grew out of failures of prudence and regulation in the US banking sector, the number of banks failing (which includes both closing their doors and being taken over at the instigation of regulators) was startling. At one point, they were failing at an average rate of more than three per week.

Dodd-Frank introduced a wide range of measures, including lending to cash-on-hand ratios, but continued to regard outstanding loans as "assets," a deeply flawed accounting principle, this newspaper argues. Dodd-Frank also improved supervision of banks and created new regulatory safeguards.

But the banking sector, especially Wall Street which, it has to be remembered, has been at the heart of every major financial catastrophe in the past 100 or so years, regaled against what it saw as fetters on its ability to function effectively.

PoTUS Trump, who has close connection with Wall Street and with businesses which rely on smaller, often regional or local, banks listened to the banks, accepting that the restrictions had led to constraints on lending which, in his linear approach, meant less expansion, less jobs, less profit for corporations and that meant that his plan to reduce corporate tax rates was in jeopardy. One thing about Trump is that there is often method and even a kind of logic in his madness.

Amongst the measures were those that protected the Federal Deposit Indemnity Corporation, FDIC. FDIC is the state funded body that covers the difference between recoverable assets when a bank fails and the amount of deposits that are guaranteed by the state, ie the USA, not the individual state where the bank is located. According to FDIC, the most recent bank to fail, ten days before Christmas last year, "The FDIC estimates that the failure will cost its Deposit Insurance Fund USD60.5 million."

But the damage was done, it might be assumed: with so many banks already dead, surely what was left were those most likely to survive.

The rate of failed banks began to slow after the introduction of Dodd-Frank.

2015 - 8
2016 - 5
2017 - 8
2018 - to 22 March - 0

To spell that out, so far this year, there have been zero bank failures. Not one. Nada.

That's startling.

And that's why, as the repeal of the measures applicable to, in particular, small banks in the USA are withdrawn, the USA's banks must now be regarded as presenting an increased risk. Yes, it's only one statistic amongst many but, brutally, it's the one that matters the most.

Failing banks lead to failing economies and failing economies, if they are big enough, lead to global financial problems.