Bad Joke

Timing Is Everything Unless You're a Bank Regulator

Rollback of rules on small banks would be a bad joke if it weren't so serious.
Photographer: Dan Kitwood/Getty Images
At Closing, March 19th
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Banking regulators, and the lawmakers who set regulations, would make terrible comedians. Their timing is almost always way off.

The most notorious example is the regulatory "streamlining" that Treasury Secretary Henry Paulson proposed in March 2008 after the financial crisis had essentially already started. But there are others, like the 2004 switch that allowed broker-dealers to pile up debt. There was also the 2003 photo opp of regulators attacking paper with scissors in front of a banner that said "Cutting Red Tape." The head of the Office of Thrift Supervision, the agency that had oversight over American International Group and was later closed because of its uselessness during the financial crisis, held a chain saw. In the mid-1980s, thrifts were essentially deregulated, just in time for them to start collapsing en masse a year or so later.

The latest in that long line of examples could turn out to be the rollback of parts of the Dodd-Frank financial overhaul law passed in the wake of the financial crisis. The Senate is putting the finishing touches on a bill that has Democratic support. The House has passed similar measures. Most expect it to pass.

Most of the changes in the bill are focused on curbing regulations for small and medium-size banks, though some have dubbed the bill the Stadium Bank Relief Act. The biggest beneficiaries could be those banks large enough to pay for sports-field naming rights but still considerably smaller than say behemoths JPMorgan Chase & Co. or Bank of America Corp. In fact, the bill has received some praise and political cover because it loosens few rules on the big banks. 

It still looks pretty shortsighted, though. While big banks, particularly large Wall Street financial firms, like Lehman Brothers, were key players in the last financial crisis, that hasn't always been the case. What's more, as lending losses start to pick up, it's the small banks that are showing signs of stress.

Not So Flush

Regulators are stripping away financial regulations when more credit card debt is going unpaid


Small banks, for example, have been muscling their way into the credit card business in the past few years, at least in part by focusing on customers with lower credit quality. That's starting to become a problem. The credit-card delinquency rate at all banks is up but still a manageable 2.7 percent, according to But at many smaller banks the rate is much higher. At the 511 banks with assets between $1 billion and $5 billion -- JPMorgan Chase, for reference, has more than $2 trillion in assets -- the delinquency rate has climbed to 6.7 percent, nearly the level it was at the height of the financial crisis. There is a similar pattern in auto loans. The biggest banks have a delinquency rate of 2.1 percent, but it's 3.3 percent for banks with assets between $100 billion and $1 trillion.

Small Order

Credit card defaults are rising faster at banks with fewer overall assets


Banks are grouped by total assets

One part of the bill would lower regulations on riskier commercial real estate loans -- those to properties still in development or with high loan-to-value ratios -- for all banks. That seems ill-timed as well. Yes, commercial real estate generally made it through the financial crisis without generating huge lending losses, but it could fare much worse in the next downturn. Malls and other retail locations make up a good portion of commercial real estate lending. Many retailers are struggling and closing stores to compete with online sales despite the solid economy. Retail bankruptcies could spike in the next downturn. A closely watched index of the health of risky commercial real estate mortgages, dubbed the CMBX 6, is trading at 84 cents on the dollar, near its lowest level ever.

Retail Woes Sting Lenders

Loans to malls and other store locations are a big portion of commercial real estate lending

Source: Bloomberg, IHS Markit

Based the CMBX BBB index.

Bank regulations are fighting the last financial crisis. The annual stress tests, for all their value, have generally put banks through the type of conditions, like high unemployment and falling housing prices, that they experienced a decade ago and not spiking interest rates or inflation, which could contribute to the next crisis. The Dodd-Frank rollback legislation working its way through Congress is more of the same. Regulators' timing is still off. It's too bad the joke is on everyone else and never turns out to be funny.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Stephen Gandel in New York at

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    Daniel Niemi at

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