Many remember the 2008 financial crisis (I wasn’t alive yet), where 25 banks failed, triggering a chain of nearly 400 bank failures over the next three years. Essentially, banks provided loans to house-seeking but highly risky buyers, most of whom were unable to afford interest on the loans nor pay them back in the prescribed period. When the housing bubble burst, many of the banks’ investments tied to these so-called subprime mortgages collapsed like a series of dominoes.
In order to prevent the same issue from occurring, the government substantially increased regulation on these banks and the loans they were able to give out. However, in 2018, a bill was signed to roll back protections against a crash, or even in some cases completely eliminate them.
This was a huge mistake, and it’s one that should be reversed. Regulations are necessary to prevent another major crisis, especially as visibility on top CEOs and the business process decreases, and the income inequality gap increases.
The Dodd-Frank Act was a good response to the financial crisis, provides common-sense protections for consumers and increases governmental oversight on big banks and their processing. Common-sense lending requires evaluation of factors outside of basic lending criteria, like name and age, to determine whether loans can be paid back sufficiently.
Specifically, the government’s Consumer Financial Protection Bureau (CFPB), which is focused on mortgage oversight and abusive lending, is key. The CFPB has received and acted on over 4 million consumer complaints since it’s been established.
The Dodd-Frank Act also allows for the orderly liquidation of failing banks. This allows the bank’s shareholders and investors to receive compensation for their shares under the assumption that these shares must be sold. The provision gives the government authority to manage and resolve a failing bank. Order liquidation had a lot of bipartisan support when the act was first passed.
Without governmental oversight, which requires substantial regulation and security checks, banks will more frequently engage in corner-cutting and prioritize short-term profit over long-term sustainability. In other words, they prioritize optimizing their quarterly stock price over their survival in the future.
The more oversight the government has, the easier it is to react to a crisis or meltdown. There would be no need to spend additional time collecting data about the banks — the government would have it all on hand.
According to Better Markets, bank deregulation over just the last five years led to the banking crisis we experienced just last year, which included the collapse of Silicon Valley Bank.
Maintaining or increasing bank regulation is a necessity, especially in the 21st century. Just two months ago, JPMorgan Chase was caught giving predatory loans to Chicago students, much in the same way as those given out prior to the 2008 financial crisis.
As we move into the 2025 Trump presidency in just a few days, maintaining bank regulation will be key to ensuring smooth economic sailing for the next four years. However, President-elect Trump has pledged to eliminate 10 existing regulations for every new regulation administered.
History is already giving us hints and clear evidence — it’s time to reverse bank deregulation and ensure we don’t start the next decade with another crippling financial crisis.
