June 16, 2017 Reading Time: 2 minutes

When the housing bubble burst in 2007 shortcomings were revealed in the risk-management practices of many financial institutions. During the Great Recession, the Financial Conditions Leverage Index reached the highest level since the 1970s. Financial institutions learned from the crisis and shored up their balance sheets. They have since increased their capital, raised liquidity standards, improved loan portfolio performance, and implemented better risk-management practices.

Improvements in the financial sector have helped loan growth and the economy recover. However, the recovery has been slow. During the current economic expansion bank loans have grown 24 percent. Previous expansions have seen more robust loan growth. During the prior three expansions loan growth has ranged from 30 percent to 87 percent. Slow credit creation is partially responsible for the anemic GDP growth since the recession. A new proposal from the Trump administration will streamline financial regulation and likely help capital formation and economic growth.

The Treasury’s plan, titled A Financial System That Creates Economic Opportunities, will make regulation more efficient, effective, and appropriately tailored. The proposal includes reducing the number of regulators. It would also adjust regulations based on the size of the financial institution. Community banks should not be subject to the same regulations as global financial institutions. Community banks serve main streets around the country, financing many small businesses. Small businesses employ a sizeable share of the American workforce.

The new plan also calls for changes in living wills. Under current law, any financial institution with $50 billion or more in assets is required to maintain a living willing. The living will lays out a plan in the event of insolvency. The will dictates how liabilities will be paid and the remaining assets dispersed. Treasury’s new plan calls for raising the asset threshold for a living a will. The new plan will reduce the number of regulators that review the will. It will also require less frequent updates. This frees up bank resources to work on lending to consumers and businesses.

A healthier banking sector with streamlined regulations will improve access to credit for consumers and businesses. This is essential to supporting economic growth. Tailored capital and leverage requirements along with clear regulatory reporting structures will reduce the pressure on the financial sector. In turn this will give banks more flexibility to give a boost to sluggish credit extension and anemic GDP growth.

Will the proposed regulatory rollbacks become law? It is uncertain. Between a stalled health care bill, tax reform on the back burner, and ongoing investigations, the Trump administration has its hands full. The new administration needs to focus on creating a favorable business environment. Passing streamlined regulations would be a good start.

Theodore Cangero

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