House Republicans Look To Push Lower Capital Standards For Banks In Through The Back Door

Posted on  

"House Republicans Look To Push Lower Capital Standards For Banks In Through The Back Door"

Congressional Republicans have been doing their best to undermine the Dodd-Frank financial reform law. They’ve tried to gut the budgets of the regulators charged with implementing the law, push back the date for when certain provisions take effect, and obstructed nominees for key regulatory positions. And legislation examined by House Republicans on Friday, if enacted into law, would be one more volley in this assault.

As HousingWire explained, a bill sponsored Rep. Bill Posey (R-FL) would permit banks to assume that modified mortgage loans held on their books have no risk whatsoever. This would allow them to lower the capital — or amount of cash — they need to keep on hand for when loans turn sour:

The House Financial Services Committee heard testimony from lenders and regulators Friday on a proposed bill that would allow banks to count recently modified mortgages as accrual loans on their balance sheets — meaning the loan can be counted on to be repaid.

The emerging concern is twofold, however, where modified mortgages could be counted as an asset and not a liability. This may create a false assumption of capital requirements, especially for lenders with large amounts of modified mortgages on the books.

Subjective overregulation makes banks less inclined to loan money for job creation, results in more foreclosures, more layoffs and longer unemployment lines,” Posey said.

But at the moment, the Federal Deposit Insurance Corp. already allows banks to count modified loans as performing, meaning that they can assume there will be payments coming in from them. While mortgage modifications are going to be very important to the economic recovery, this bill would allow banks to treat a modified loan as having no risk, even when the banks are well aware that a borrower is in trouble. The banks would then be able to lower the amount of capital they keep on hand, chipping away at the foundation of the financial system.

George French, an FDIC deputy director, said the bill “‘would result in an understatement of problem loans‘ on banks’ balance sheets, [and] overstate the amount of capital they hold against losses.’” MIT Professor Simon Johnson added, “In some ways, the bill duplicates what the FDIC already does. But classifying loans as ‘accrual’ when they are either not receiving the full interest due or when the institution knows there will be a problem is not a good idea.”

During the 2008 financial crisis, it became abundantly clear that America’s largest banks did not have sufficient capital on hand to weather the storm created by the housing crisis. So many loans went into default when the housing bubble burst that the banks were on the verge of collapse. As a result, both Dodd-Frank and new international accords stipulate higher capital requirements for banks. This bill proposed by the GOP would undermine that effort.

« »

By clicking and submitting a comment I acknowledge the ThinkProgress Privacy Policy and agree to the ThinkProgress Terms of Use. I understand that my comments are also being governed by Facebook, Yahoo, AOL, or Hotmail’s Terms of Use and Privacy Policies as applicable, which can be found here.