Bank Watch

Lawmakers: Rule repeal lets BofA, other banks hold $10T in risky trades

Sen. Elizabeth Warren, D-Mass., says last year’s partial repeal of a Dodd-Frank Act provision has allowed Bank of America, Citigroup and JPMorgan Chase & Co. to keep a combined nearly $10 trillion in risky trades on their books.
Sen. Elizabeth Warren, D-Mass., says last year’s partial repeal of a Dodd-Frank Act provision has allowed Bank of America, Citigroup and JPMorgan Chase & Co. to keep a combined nearly $10 trillion in risky trades on their books. AP

Two of Congress’ biggest Wall Street critics say last year’s rollback of a post-financial crisis regulation has allowed Bank of America and some other big banks to keep nearly $10 trillion in risky trades on their books, Bloomberg reports.

Last week, Democrats Sen. Elizabeth Warren and Rep. Elijah Cummings released their analysis of December’s partial repeal of a section of the 2010 Dodd-Frank financial overhaul law. The repeal, included in must-pass spending legislation, reversed a provision requiring banks to separate swaps trading from deposit-taking units.

A press release on Warren’s website says that, had it not been for the repeal, the roughly $10 trillion in swaps trades would be “pushed out” to entities not insured with taxpayer funds. Most of that amount is on the books of Bank of America, Citigroup and JPMorgan Chase & Co., Warren said in remarks on the Senate floor last week.

“Now, a few banks – a few too-big-to-fail banks – are going to keep another $10 trillion in risky business on their books,” Warren said.

For their part, banks argue the analysis by Warren and Cummings is based on the face value of transactions, which overstates the actual risk to lenders from the swaps.

In a letter this year to Warren, Bank of America said the number “fails to account for how credit risk is managed and mitigated” and is “not a meaningful measure of potential exposures.” Banks also have said the “push out” requirement would have raised their costs.

A Bank of America spokesman declined to comment beyond the letter.

The Office of the Comptroller of the Currency, in a letter to Warren this year, noted a wide variety of companies use derivatives to manage their risks. A swap is a type of derivative.

The regulator also said revenue from the products that banks were being told to push out actually help to diversify their trading portfolios. Pushing out certain trades, the regulator wrote, would likely result in increased risk of losses for banks.

But some derivatives have also taken on a bad name since the financial crisis. Credit default swaps are widely blamed for helping fuel mortgage lending as the housing bubble expanded in the run-up to the crisis.

Warren, a member of the Senate Committee on Banking, Housing, and Urban Affairs, said last week the financial services sector continues pushing for repeals of Dodd-Frank rules. One tactic the industry is using is to attach rollback measures to must-pass legislation, like highway and government-funding bills, Warren said.

“The lobbyists are swarming this place, she said on the Senate floor. “They want to roll back financial regulations, and they’re working every contact they can to attach these rollbacks to anything that moves.”

One recent rollback effort: On Wednesday the U.S. House passed legislation the Obama administration says will undermine mortgage protections that took effect early last year. The protections were issued by the Consumer Financial Protection Bureau, an agency created by Dodd-Frank.

Some bankers have publicly supported Dodd-Frank, including Bank of America CEO Brian Moynihan.

In a letter this year to Warren and Cummings, Citigroup, which supported last year’s repeal, wrote that Dodd-Frank has “strengthened our financial system.”

Deon Roberts: 704-358-5248, @DeonERoberts

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