Trump Cites Friends to Say Banks Aren’t Making Loans. They Are.

(Bloomberg) -- As he prepared to sign orders designed to roll back bank regulations enacted to stop the next financial crisis, President Donald Trump said that the rules are stifling lending.

“We expect to be cutting a lot out of Dodd-Frank, because frankly I have so many people, friends of mine, that have nice businesses and they can’t borrow money,” Trump said on Friday. “They just can’t get any money because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank."

That may be the case for the president’s friends -- although Trump pal Carl Icahn seemed to have little trouble two weeks ago when he borrowed $1.2 billion -- but it’s not supported by data.

Lending declined initially after 2008, when the entire banking industry was almost wiped out by the collapse of the U.S. housing market. But it’s grown steadily since then, expanding by 6 percent a year since 2013, far faster than the economy. Banks now have a record $9.1 trillion of loans outstanding.

“Loan growth remains robust,” JPMorgan Chase & Co. Chief Financial Officer Marianne Lake said last month on a conference call with analysts.

At JPMorgan, the biggest U.S. bank, core loans increased 10 percent to $806.2 billion last year, with gains in every category including credit cards and wholesale debt. Bank of America Corp.’s total loans climbed 1.1 percent to $906.8 billion, while Wells Fargo & Co.’s grew 5.6 percent to $968 billion.

‘Reducing Transparency’

“I don’t think this is about the financial sector making more loans,” said Michael Barr, a University of Michigan law professor who helped design the Dodd-Frank Rule while working for the previous administration. “They are reducing transparency in the system and reducing guardrails that are going to keep the system safe.”

One hated provision of Dodd-Frank -- the Volcker rule -- bans the largest firms from making speculative bets with their own money. Goldman Sachs Group Inc.’s return on equity, a measure of profitability, has dropped from as high as 34 percent before the crisis to 8 percent last quarter. That means less money for bonuses and shareholder dividends.

Former Goldman Sachs President Gary Cohn, now Trump’s top economic adviser, looked on Friday as Trump signed two directives aimed at loosening financial regulations. Among the targets are the Volcker rule, the Consumer Financial Protection Bureau and a requirement that advisers on retirement accounts work in the best interests of their clients.

Cohn said in a Bloomberg Television interview that the administration can make many changes without the involvement of Congress, where Trump’s deregulatory agenda will face Democratic opposition.

“Every place a bank needs to hold capital and they need to retain capital prohibits them from lending,” Cohn said in the interview. “So we’re going to attack all aspects of Dodd-Frank.”

Bank Capital

Banks don’t actually “hold” capital. In banking, capital refers to the funding they receive from shareholders. Every penny of it can be loaned out. A 5 percent minimum capital requirement means that 5 percent of the bank’s liabilities has to be equity, while the rest can be deposits or other borrowing. The more equity a bank has, the smaller its risk of failing when losses pile up.

“The claim that regulations are prohibiting lending is simply false,” said Anat Admati, a Stanford University finance professor and member of the Federal Deposit Insurance Corp.’s Systemic Resolution Advisory Committee. “The banks have plenty of money and can raise more from investors like other businesses if they have worthy loans to make. If they don’t lend, it’s because they choose not to lend and instead do many other things.”

While raising capital requirements doesn’t prohibit lending, it can slow the growth of loans because banks are often reluctant to raise more equity from shareholders.

Dodd-Frank also didn’t set capital requirements. Those are decided internationally by regulators from 27 countries that gather at the Basel Committee on Banking Supervision.

Former Goldman Sachs partner Philip D. Murphy, who was a member of the bank’s management committee with Cohn and Treasury Secretary nominee Steven Mnuchin, said he’s mystified by the changes they’re pushing.

“To think that undoing those regulations is going to lead to a better result is folly,” says Murphy, who’s seeking the Democratic nomination in this year’s New Jersey gubernatorial race. “The fox is in the hen house, that’s what this is. This is people on Wall Street who should know better.”

--With assistance from Max Abelson Dan Wilchins and Felice Maranz To contact the reporters on this story: Zeke Faux in New York at zfaux@bloomberg.net, Yalman Onaran in New York at yonaran@bloomberg.net, Jenny Surane in New York at jsurane4@bloomberg.net. To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net, Steven Crabill, Dan Kraut