During the last two weeks, comments from top Federal Reserve officials and the results of this year's stress tests have made it clear that the regulatory "pendulum" has started to swing definitively in the de-regulatory direction.
In a key milestone for systemically important banks, the Fed approved every bank's capital plans and approved capital payouts for the group as a whole that were about equal to their earnings -- meaning that, for the first time since the financial crisis, banks will be paying shareholders back everything they earn, and no longer setting capital aside. This move to loosen the restrictions on the regulatory front comes at a time when a number of top Fed officials are growing increasingly worried about an overheating financial system and the potential for a sharp reversal in the slow-but-steady growth of the U.S. economy this decade.
According to the the just-released minutes of the Federal Open Market Committee's last meeting, Chair Janet Yellen and her cohorts spent much of their last meeting discussing why, exactly, investors have responded to the Fed's interest rate hikes by pushing stocks and other risky markets to all-time highs. (They've taken away the punch bowl only to find that the party-goers brought their own flasks ).
Even Capital One, which was asked to resubmit its capital plan, was given a tacit go-ahead despite the Fed citing weaknesses in its planning (and its exposures to automobile loans and its massive credit card business, which also happen to be two of the credit areas flashing the brightest warnings lights of growing stress).
The stress test and capital results followed comments to a Congressional panel from the new unofficial regulatory czar, Governor Jerome Powell, which indicated that the Fed is beginning a broad review of the regulatory framework it has instituted since the financial crisis and the passage of Dodd-Frank. Powell said the Fed is considering placing its living will plans on a two-year cycle. He also said the Fed is pushing the other regulators to revisit the Volcker Rule, and suggested Congress may want to do the same, and hinted that the Fed might eliminate the qualitative objection of its CCAR tests, which would effectively hamstring bank regulators from raising really any non-quantitative red flags during the process.
Finally, Powell said that the Fed will reconsider how it determines the appropriate levels of its supplementary leverage ratio, a risk-based measure of capital which could have a significant impact on how banks define the riskiness of their balance sheet and, ultimately, how high they can push their own leverage.
The sharp change in tone and permissiveness of the capital returns underscores the extent to which Republican control of the oversight machinery is likely to usher in an era of deregulation -- perhaps even to the extent that occurred in the late 90s and early Aughts in the run-up to the financial collapse of 2008. It's not hard to imagine President Trump or someone in his administration catching wind of this picture from 2003 in which a group of banking overseers cut through banking regulations and pondering whether Steve Mnuchin can pull of wielding a buzzsaw.
And it is no accident that the softened stance on Volcker and CCAR testing comes on the heels of the departure of former Fed Governor and supervision czar Daniel Tarullo, who, as was obvious by their seething and barely contained hatred of him, neither a product nor a tool of the money-center banks. (Unlike Powell, a veteran of the George W. Bush administration and the finance world, as well as Vice Chair Stanley Fischer, a Citigroup veteran who downplayed essentially every potential risk to the financial system and economy in a speech last week).
In fact, it's hard to truly understate how much the banking industry held Tarullo in utter contempt and blamed him for much of the regulatory crucifixion (through no fault of their own!) to which they claimed they were being subjected. Judging by how quickly they've made gains on some of their most belly-aching complaints in since he left, perhaps they were right to view him as the villain standing between them and once again engaging in barely-fettered capitalist lending.
Allowing the banks to dole out capital in excess of their earnings power, and rolling back the strictures put in place since the financial crisis, is also a far cry from the plans advocated by those outside the halls of the Federal Reserve Board's Washington hallways.
Minneapolis Fed President (and Dealbreaker Favorite) Neel Kashkari, for example, has suggested that the still too-big-to-fail banks be treated like nuclear power plants. Even the influential GOPer Rep. Jeb Hensarling, chair of the House's Financial Services Committee, has advanced legislation for overhauling financial regulations which would simplify the morass of regulatory rules for big banks but also require them to carry far greater levels of capital.
These efforts appear to be policy footnotes to a much different agenda for now, however -- as they will remain historical footnotes whenever the ascendant deregulatory agenda reaps the inevitable financial calamity Fed officials have bowed to sowing.