The Great Recession of 2008 was largely compounded by weaknesses in the U.S. banking system, making it vulnerable to economic and market declines. In an effort to shore up the system, Congress passed the Dodd-Frank Act of 2010, which levied sweeping reforms on the financial sector.1 As a result, the banking system is far stronger than it was a dozen years ago, and it’s in better shape to weather this latest crisis.
Within the banking sector, Dodd-Frank mandated new oversight and regulations for all bank holding companies, including mortgage lending. Part of these mandates included regular “stress testing” for maintaining minimum capital levels and meeting specific criterion regarding the quality and quantity of that capital.2
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It’s worth noting that Dodd-Frank reforms have not been universally popular, particularly not with the current presidential administration. Shortly after his inauguration in 2017, President Trump signed an executive order to re-assess post-recession regulatory acts such as Dodd-Frank and the Consumer Protection Act. Among other goals, the purpose of this action was to help prevent taxpayer-funded bailouts in the future.3
In response to this direction, Congress passed legislation in 2018 designed to ease rules on all but the largest banks. Legislators believed that lifting many of those regulatory burdens on small and medium-sized lenders could help boost economic growth.4
In wake of the recent COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. One of the measures in the bill is the Paycheck Protection Program, designed to offer nearly $350 billion in loans to qualifying small businesses. If businesses adhere to certain criteria regarding the use of those funds, the loans may be forgiven and not be required to be repaid.5 In turn, lending banks could collect billions of dollars in fees to further shore up their own defenses. In addition, the Federal Reserve recently relaxed its supplementary leverage ratio, which means that big banks do not need to hold as many safe government assets, in turn making it easier for them to meet their capital requirements.6
These past measures have put banks in a stronger position today. However, a pandemic has a somewhat less predictable recovery path than previous economic declines. In case this situation continues longer than expected, the $2 trillion CARES Act that Congress passed in late March included backstops designed to strengthen the banking system if it began to experience cracks. One such feature enables the Federal Deposit Insurance Corporation (FDIC) to guarantee checking accounts beyond the $250,000 in deposit insurance that it now offers bank customers.7
1 Sean Ross. Investopedia. March 31, 2020. “What major laws were created for the financial sector following the 2008 crisis?” https://www.investopedia.com/ask/answers/063015/what-are-major-laws-acts-regulating-financial-institutions-were-created-response-2008-financial.asp. Accessed April 20, 2020.
2 Daniel K. Tarullo. Federal Reserve Board. Dec. 2, 2016. “Financial Regulation Since the Crisis.” https://www.federalreserve.gov/newsevents/speech/tarullo20161202a.htm. Accessed April 20, 2020.
3 The White House. Feb. 3, 2017. “Presidential Executive Order on Core Principles for Regulating the United States Financial System.” https://www.whitehouse.gov/presidential-actions/presidential-executive-order-core-principles-regulating-united-states-financial-system/. Accessed April 20, 2020.
4 Jacob Pramuk. CNBC. May 24, 2018. “Trump signs the biggest rollback of bank rules since the financial crisis.” https://www.cnbc.com/2018/05/24/trump-signs-bank-bill-rolling-back-some-dodd-frank-regulations.html. Accessed April 20, 2020.
5 U.S. Small Business Administration (SBA). “Paycheck Protection Program.” https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program. Accessed May 4, 2020.
6 Knowledge@Wharton. April 6, 2020. “Are U.S. Banks Strong Enough to Weather the Downturn?” https://knowledge.wharton.upenn.edu/article/are-u-s-banks-strong-enough-weather-coronavirus-pandemic/. Accessed April 20, 2020.
7 Zachary Warmbrodt. Politico. March 27, 2020. “Washington quietly prepares a bank rescue — just in case.” https://www.politico.com/news/2020/03/27/congress-coronavirus-bank-rescue-152501. Accessed April 20, 2020.