It is time to put to rest the straw man argument that groups in Washington that want to recapitalize the government sponsored enterprises or build a capital buffer want to “recap and release” the GSEs without reforms. Unfortunately this argument is the approach taken in, “Here's why small lenders should support GSE reform.” Congress needs facts and a proper and correct reminder of history as they debate allowing too big to fail (TBTF) institutions to become GSEs and whether to have a capital buffer.
First, the broader debate about recapitalizing the GSEs and taking them out of conservatorship should not be confused with the need for the GSEs to have a capital buffer for inevitable market movement. As the derivatives market moves, the GSEs capital will move accordingly. The original Treasury proposal was for the GSEs to maintain $10 billion in capital for such a market movement. The Obama administration rejected the Treasury's $10 billion reserve plan and brought capital to zero come Jan. 1, 2018, likely to force Congress to act. The concern today is the perception of a crisis in housing when a draw is needed.
Second, no plan to date has proposed – and no legitimate plan would propose - simply recapitalizing and releasing the GSEs from conservatorship without retaining a broad range of reforms already put in place. In fact, the only recap and release that has occurred since the financial crisis were the TBTF institutions, which were given billions by the Treasury (or bank charters) during the crisis.
A draw is inevitable if the GSEs have zero capital, which is why groups like the Community Home Lenders Association praised Federal Housing Finance Agency Director Mel Watt on his position at the Senate Banking Committee hearing in May.
Third, the main issue for small lenders is not whether Congressional reform will take place, but whether legislation will include critical protections to protect small lenders. These include prohibiting the large Wall Street Banks from having any ownership interest or control of new or existing GSEs (vertical integration) and whether there are rules on risk sharing that prohibit volume discounts and other practices which discriminate against small lenders.
Finally, the decisions Congress must make will determine whether the mortgage market will become more concentrated or whether we simply accelerate the role of TBTF institutions. On that, I would point to a speech by Federal Deposit Insurance Corporation Vice Chairman Thomas Hoenig from May 12.
A few of his significant points include:
- The four largest U.S. banking firms in 1992 held roughly 14% of total industry assets. Today, the four largest banking firms hold 42% of total industry assets. Further, assets of these four largest are now approximately $7 trillion, an amount equal to 38% of U.S. gross domestic product.
- …this represents less concentration in the U.S. banking industry than elsewhere in the world. However, the rest of the world is not the United States, which has thrived on small business and entrepreneurship and which, since its founding, has distrusted concentrated power.
- Whether one views these forces of change as positive, negative, or indifferent, it is inarguable that they have transformed banking in the United States, giving us systemically important financial institutions, or SIFIs, that dominate the industry and increasingly dominate our economy.
When the Hoenig facts are coupled with the Herfindal-Hirschman Index (HHI), it should be clear to Congress that we already have a concentration problem in US banking. The HHI is the index the United States government uses as an objective measure of how competitive a market is.
Hoenig also states: To add further perspective, the 20 largest banks today hold more than 60% of industry assets. The banking HHI index is well above 1800 (denoting a highly concentrated noncompetitive market) and to open the door for these institutions to become GSEs would further exacerbate the problem. Since the Great Recession there have been less than a handful of de novo bank charters issued, so the problem will likely get worse before it gets better.
The well-funded entities in this debate are noted by Hoenig. The TBTF institutions simply cannot get any larger and any plan that allows for that possibility is flawed. There are several plans for housing reform. The Independent Community Bankers of America, National Association of Federally-Insured Credit Unions and Main Street Coalition (MSC) have submitted plans/criteria. MSC is comprised of several trade groups – CHLA, Community Mortgage Lenders of America, Leadership Conference on Civil and Human Rights Leading Builders of America, National Association for the Advancement of Colored People, and the National Community Reinvestment Coalition.
None of these proposals call for additional GSEs. They do call for level playing fields and specific small lender protections.
Most of us in the debate have long memories. I recall when Angelo Mozilo called for the end of the GSEs so companies like Countrywide could run the business. Now some want to follow the Mozilo plan? Even Bank of America pulled out of that concept.