Last week brought some encouraging news about the nations banking industry: The Federal Deposit Insurance Corp. said bank earnings in the first quarter rose to the highest level in nearly five years and the number of troubled banks fell for the fourth consecutive quarter.
But hold the applause.
While two out of three banks reported improved earnings, bank loans to garden-variety consumers fell in most categories.
The number of FDIC problem banks fell from 813 to 772 compared to the previous quarter, but a spokesman for the American Bankers Association said growth in lending will continue at a gradual pace — i.e., slowly — until the housing market improves.
And then there’s that $2 billion loss by JPMorgan Chase (or was it $3 billion? Or more?). Has Wall Street already forgotten the lessons of 2008 — or were they never learned in the first place?
All in all, it’s a mixed picture that raises doubts about the direction of the economy. Banks are doing better, but consumers in need of credit and homeowners under water with their properties have been left in the lurch.
This means stronger action is needed to ensure that banks and the financial markets dont pull the economy into another tailspin. The JPMorgan fiasco is the most serious. Consider that it happened to the biggest New York bank to avoid the Wall Street collapse of 2008. If it can happen there ….
The bank’s self-assured chief executive, Jamie Dimon, has led the charge against stiff regulation under the Dodd-Frank reforms, but now his own institution has been exposed as vulnerable. Dimon acknowledged the losing trades were stupid and sloppy, but he first claimed they did not violate proposed rules barring banks from doing risky trading for their own account.
Later, however, a bank spokesman said they may have crossed the line after all. The problem is that without transparency, no one really knows. And without effective regulation, more episodes like this are bound to occur.
If only Dimon’s investors and depositors were hurt, that would matter less.
But because of the bank’s iconic standing in the minds of investors, such mistakes affect the entire economy. They raise questions about the stability of financial institutions and equity markets. Other bankers, especially smaller ones, fear a recurrence of 2008 and make it harder to extend credit. Consumer confidence plunges.
Foreign investors are equally bewildered, wondering if anyone’s in charge of the U.S. economy.
Dimon has owned up to the mistakes, but he appears to have learned little from this incident. Instead of trying to turn Dodd-Frank into a toothless instrument, he should acknowledge that Wall Street needs a strong sheriff, and that rules restricting hyper-risky trades need to be enforced.
Meanwhile, regulators have been slow to roll out the new rules under Dodd-Frank. In large part, this is the result of lobbying by Dimon and his Wall Street cohorts. If strong rules against derivatives had been in place, including transparency, regulators and the market might not have been caught unawares. The resulting shock — and the huge loss — might have been avoided.
Self-regulation on Wall Street isn’t working. The Obama administration should push its regulators to move faster to rein in the big banks. As long as banks that are too big to fail are allowed to operate outside an effective regulatory system, the economy will remain vulnerable to another recession.