Looking back, moving forward: America and financial reform

This month marks nine years since the collapse of Lehman Brothers, the first domino to fall in a series of catastrophic events that triggered the Great Recession. The economic earthquake of 2008 demolished the housing industry, sent world markets into a tailspin, and brought the American banking system to its knees. Only now—after nearly a decade of stagnant wages and anemic growth—is our economy finally coming up for air.

With American businesses slowly returning to full strength and the prospect of tax reform on the horizon, we have a golden opportunity for economic renewal. The question is, will we take it? Will we seize the opportunity to enact policies that will give our economy a competitive edge and ensure our continued prosperity? Or will we squander this opportunity and content ourselves with the status quo?

To be clear, the status quo is unacceptable. Our country cannot sustain another decade of static wages and dwindling productivity. So the only realistic option we have before us is to press forward—full steam ahead—on legislation that will optimize investment, spark innovation, and give American industry the jolt it needs to succeed in an increasingly competitive global economy.

{mosads}The road to renewal starts with tax reform. I have spoken at length on this issue, and I will continue speaking out until Congress agrees on a comprehensive tax overhaul that boosts businesses, creates good-paying jobs, and strengthens the middle class.

As of late, tax reform dominates most conversations regarding economic policy. But in addition to streamlining the tax code, there are other pro-market solutions that may not get as much coverage on national TV but that are just as vital to jumpstarting our economy. These initiatives include expanding free trade, reining in harmful regulations, and taking action on an issue I have championed for many years: the need to simplify America’s financial rulebook.

On this last point—updating financial regulations—I have three ideas for lasting reform.

First, stop crushing small banks with regulation. After the last financial crisis, many large banks were thrown a lifeline while smaller community banks were told to sink or swim. And many of them sank. In the post-crisis reaction to the economic meltdown, regulators treated all banks, no matter how large or small, as more or less the same. This one-size-fits all approach to financial regulation affected small banks disproportionately. In the federal government’s zeal to punish the irresponsible actions of large financial institutions, small lenders—the banks that bore no responsibility for the economic meltdown—took the brunt of the beating.

As a result of this regulatory overreach, America’s local communities have suffered, and many small financial institutions have struggled or even gone out of business. And the customers they serve get the short shrift. Largely as a result of the Dodd-Frank Act, the 849-page Obama administration overhaul of U.S. financial regulation, there are 1,736 fewer community banks today than there were when the bill was signed into law. Fewer community banks leaves the men and women of America’s heartland with fewer lending options and limited access to capital.

Dodd-Frank was the death knell for hundreds of small banks across the country. Between 2010 and 2016, compliance with Dodd-Frank cost $36 billion and required 73 million paperwork hours. With their vast resources, larger banks could stomach these regulations through automation and additional staff. But smaller banks could not. Saddled with extra compliance requirements and with no material benefit to resilience, they buckled under the weight of these burdensome regulations.

To give small banks the reprieve they desperately need, I introduced the Community Bank Relief Act (S. 1284), a bipartisan bill that extends small bank lending opportunities to families, small businesses, and startups. Importantly, my bill preserves critical financial safety measures but without the regulatory overreach that has suffocated so many small banks.

Small banks are the financial lifeblood of many communities, and without them, business dries up. Consider that, over the past decade, the percentage of small business and commercial loans dropped more than 15 percent. To encourage lending, my proposal promotes commonsense policies that will help small lenders and borrowers in a manner consistent with banking soundness, regulatory efficiency, and economic growth.

Like community banks, regional banks also need relief from overbearing regulations that do more harm than good. That’s why Congress should raise or recalibrate the threshold for a bank to be deemed a “systemically important financial institution,” or SIFI. The SIFI threshold, currently $50 billion in assets as designated by Dodd-Frank, mandates that regional banks undergo stress tests and capital reviews similar to some of the largest, most complex global financial institutions. Similar to the unrealistic expectations put on community banks, this one-size-fits-all approach negatively affects regional banks too.

To move forward on the road to economic renewal, financial regulators should focus not just on resilience but also on efficient resilience. This means making regulatory refinements direct and transparent. Post-crisis policies achieved some important objectives, but they also bred a sprawl of conflicting directives that led to uncertainty for financial institutions.

Dodd-Frank alone enacted more than five times as many restrictions as any other law passed by the Obama administration and more than 22,000 pages of regulations. As with any massive legislative overhaul, improvements can be made. The Federal Reserve, for instance, should be more open about explaining its capital review measurements so that expectations are clearly understood.

We must embrace creative and responsible solutions to strengthen the financial system and improve the health of the American economy. And we must act fast before the window of opportunity closes.

Hatch is chairman of the Senate Finance Committee.