WASHINGTON, D.C. — U.S. Sen. Sherrod Brown (D-OH) – ranking member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs – delivered the following speech on the Senate floor today on the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) Stress Test results. The CCAR Stress Test is an annual exercise by the Federal Reserve to assess whether the largest banks operating in the United States have sufficient capital to weather downturns in the economy.
Brown’s remarks, as prepared for delivery, follow.
Earlier this month, the Fed released the results of its annual stress tests – exercises that try to ensure our largest banks can withstand economic shocks, and won’t need another taxpayer bailout in the event of a crisis.
And what happened with these tests illustrates exactly what is wrong with Washington and what’s wrong with Wall Street.
The Fed allowed the seven largest banks to redirect $96 billion that should be used to pay workers, reduce fees for consumers, and protect taxpayers from bailouts, and instead plow that money into share buybacks and dividends that reward wealthy executives and investors.
Two banks – Goldman Sachs and Morgan Stanley – had capital below the required amounts. That’s right – these banks failed the test, but got passing grades anyway.
The Fed called them up, let them haggle over the test results, and allowed them to proceed with buybacks and dividends that would drain their required capital.
In what classroom in America would a teacher negotiate over test results and allow a student to pass the exam after earning an “F?”
But the stakes in this case are a lot higher than one midterm exam.
We’re talking about the biggest banks in the country, and whether they send money to rich investors or instead have enough skin in the game to protect taxpayers.
Why are these buybacks such a problem?
Share buybacks and dividends juice stock prices, but do little to increase long-term growth in companies or reward the workers that make a company’s success possible.
During the last crisis – we saw big banks send money out the door with buybacks and dividends just months before they imploded and cost taxpayers billions. Watchdogs had the tools to intervene sooner, but instead courted Wall Street at the expense of the rest of the country.
The seven largest banks in the country increased their 2018 dividends paid to investors by a generous 24 percent compared to last year.
And of the banks that the Fed allowed to increase their stock buybacks, they increased their repurchases by a stunning 63 percent.
What teller, or sales person, or even bank manager got a raise like that in the last year?
Wells Fargo doubled its buybacks – an increase of more than 100 percent. The money spent on stock buybacks alone is 314 times more than what it cost the bank to boost employee wages to $15 an hour.
Wells CEO Tim Sloan received a 36 percent raise last year, even in the wake of scandal after scandal.
So we have Wall Street banks rewarding themselves rather than workers, and in the process draining the capital that should be their safeguard against taxpayer bailouts.
This problem is only going to get worse. The Fed wants make the tests even easier next year, weakening the key constraint that caused Goldman Sachs and Morgan Stanley to fail this year – or would have caused them to fail, if they hadn’t talked their way out of it.
Fed Vice Chair Quarles has also floated giving more leeway to bankers to comment on the tests before they’re administered – that’s like letting the students help write the exam.
And they’re considering dropping the qualitative portion of the stress tests all together.
That’s the part of the test that examines banks’ risk management processes, data systems, and the fitness of its board of directors.
Banks like Deutsche Bank, Santander, Citigroup, HSBC, and RBS have all failed on qualitative grounds before. But rather than taking that as evidence that these banks need to shape up, they’re considering scrapping this critical part of the exam.
And the Dodd-Frank roll-back bill this Congress just passed will also make next year worse.
The Fed, right now, is considering how to replace existing stress tests for banks with between $100 and $250 billion in assets to make them easier on the banks and less frequent.
And rather than having annual company-run stress tests for the very largest banks – those with more than $250 billion in assets – the tests will only be required to be “periodic.” Whatever that means.
And of course all this test-curving comes alongside the weakening of other financial protections – dismantling the Consumer Protection Bureau, undermining the Volcker Rule, weakening the Community Reinvestment Act, loosening rules around big bank capital.
Imagine if the people in this town listened as much to workers as they did to Wall Street bankers.
It’s amazing how money talks in this town.
We need to listen a lot more to the people we serve, and a little less to these special interests.