Banking Reform Proposals

The Biden Administration released (March 30) a set of banking regulatory reform proposals in the wake of the March banking crisis that followed the collapse of Silicon Valley Bank (SVB) and Signature Bank. The President is urging action on the proposals by the appropriate regulatory agencies.

Among other things, the proposals primarily include actions that reinstate measures modified or dropped by the Trump Administration such as:

• Reinstating tougher liquidity requirements previously in place for banks with assets between $100 and $250 billion. The requirements were dropped for banks with assets below $250 billion.

• Reinstating annual, instead of current biennial, capital “stress tests,” where regulators evaluate bank risk and the capital they have to withstand the potential losses associated with risks.

• Reinstating, for banks $100 to $250 billion in size, to submit comprehensive resolution plans which assert a bank failure would not threaten the financial system.

The President’s request for regulatory action follows his call (March 17) for legislative action by Congress to address bank executive accountability. 

Specifically, the President requested legislative action that (1) expands Federal Deposit Insurance Corporation (FDIC) authority to enable the agency to claw back compensation of executives of failed banks like SBV and Signature; (2) strengthens FDIC authority to prevent executives from holding future banking industry jobs when their banks enter receivership; and, (3) expands FDIC authority to levy fines against executives of failed banks.

It is not presently clear if, or when, Congress might consider these and/or other bank reform legislative proposals.

Full coverage of the banking crisis can be found here.

(posted: 3-31-23)

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Latest CBO Economic Outlook

The latest economic outlook (February 15) of the Congressional Budget Office (CBO) paints a difficult federal fiscal picture for the coming decade.

In this periodically updated series, CBO provides its “baseline projections” of the federal budget and the economy over the next 10 years if current laws governing taxes and spending generally remain unchanged.

Among the key projections: federal mandatory spending will rise 47% in the coming decade driven primarily by Social Security and Medicare program growth, as well as interest on federal deb; and the budget deficit doubles in dollar terms (to $2.7 trillion) and grows as a percent of the economy (i.e., GDP) from 5.2% to nearly 7%.

All federal debt will grow from 98% of the economy to 118% over the next decade if nothing is done to adjust the current policy trajectory. Debt will explode to 195% of the economy over the next thirty years.

On the upside, inflation should be dramatically lower between this year and next year, with the Consumer Price Index dropping from a 8.0% rate last year to a 4.0% rate this year, and 3.0% rate next year.

(posted: 2-15-23)

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EU Corporate Minimum Tax

The European Union (EU) reached an agreement (December 12) to impose a 15% minimum tax on large corporations (more than €750 million in income).

This action follows an action by the United States in August 2022, with the enactment of a similar 15% minimum tax on corporations contained within the Inflation Reduction Act.

The tax will have to be adopted by EU member countries within individual tax law by the end of 2023.

(posted: 12-16-22)

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Rail Labor Dispute

Both the House and the Senate voted to approve a measure imposing a September tentative labor agreement on rail workers. While the House passed an additional measure impose 7 annual paid sick leave days on rail companies for each union member, the Senate did not pass that action. The President signed (December 2) the base measure putting the agreement into place (that does not include additional sick leave).

President Biden had requested (November 28) that Congress intervene in contract negotiations between rail unions and companies, and impose the terms of a tentative labor agreement finalized in September. Workers in 4 of 12 rail unions failed to ratify the agreement which could result in a strike by all unions as early as December 9.

Sick leave has been a key sticking point. Unions originally asked for 15 paid sick days, but railroads only agreed to one personal day in the tentative agreement. While not the only issue of concern to rail workers, this is considered to be a major concern among most workers.

(posted: 12-2-22)

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Britain’s Fiscal Plan

Britain’s new Finance Minister, Jeremy Hunt, announced (November 17) a new financial plan for the government under new Prime Minister Rishi Sunak. This plan replaces a plan put in place by former Prime Minister Liz Truss, who resigned from office just a couple of months after taking office. The prior plan sent British markets, and to an extent world markets, into turmoil and led to her resignation.

Under the prior plan, the British Government planned to cut taxes significantly and raise spending, which would have necessitated a massive increase in government borrowing. Under the new plan, taxes will be increased by £25 billion and spending reduced by £30 billion.

On the tax side, the most impactful changes are tax changes on individuals. Specifically, Britain’s highest tax rate (45%) will be applied to those earning about £125K per year, down from £150K. Tax free dividends will be reduced from £2K per year to £1K. Exempt capital gains will be reduced from about £12K per year, to £6K next year, and then to £3K the next year.

The plan also includes much more modest tax changes on business, but does include a significant increase in an existing windfall profits tax on the energy sector. The windfall tax rate will rise from 25% percent to 35%.

(posted: 11-21-22)

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Debt Ceiling Increase Future Challenge

Current House minority leader House Minority Leader Kevin McCarthy (R-CA) has indicated that if Republicans become the majority in the House in the next Congress (starting in January 2023), they will challenge the Biden Administration on raising the US debt ceiling, an action that will be needed early in 2023.

Exactly what a Republican-led House would be specifically looking for from the Biden Administration in return for raising the debt ceiling of current law (i.e., $31.4 trillion) has not been specified, but in the past some advocates have sought measures to substantially cut and/or control Federal spending going forward.

Opponents for using debt ceiling law as leverage to secure spending cuts argue that putting the full faith and credit of the United States at risk because of a political stalemate on spending could lead to massive and detrimental economic, social, and national security consequences. Borrowing currently finances about 22% of all Federal spending (2022), and a disruption of a US credit line from lenders and/or a default on US debt could lead to massive spending cuts on national defense, Social Security and Medicare, and other critical programs. It could also lead to a major contraction in the US economy putting millions of Americans out of work. 

Opponents also argue that a perception of the debt ceiling as a point of leverage is illusory, serving neither party and only imposing political and economic chaos on the American people and, also likely, the worldwide economy.

Advocates argue that something must be done to reign in US Federal spending which has gotten out of control and is not sustainable over the long term; that uncontrolled spending will damage the US and our economic future if nothing is done starting now. In other words, advocates might argue that there will eventually be a reckoning on Federal spending, and why not have that reckoning right now.

Opponents believe that advocates actually do not want to cut spending significantly, having supported massive spending increases and revenue-decreasing tax cuts as recently as the Trump Administration, along with raising the debt limit. Opponents hold that advocates merely want to try and gain political points by forcing actions that they mistakenly believe largely benefit Democrats with cuts only to Democratic program priorities.

Strategically, however, this is unlikely. If Republicans were to successfully force massive spending cuts using a debt limit increase as leverage, then that will mean there was a negotiated solution that involves cuts to programs/controls on future spending that undermine the budgetary priorities of both parties. This is what has occured in the past with negotated political solutions on the budget.

(posted: 10-25-22)

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IMF Economic Growth Forecast

The International Monetary Fund (IMF) released (October 11) its annual World Economic Outlook report, this one focused on “Countering the Cost-of-Living Crisis.”

The key projection: global economic growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023, while global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but decline next year to a slower but still elevated level of 6.5 percent. The global economic slowdown will be realized this year, or next, in countries making up one-third of the global economy.

Given risks to the world economy, there is a 25 percent chance of global growth falling below 2.0 percent from the 2.7 percent projection. Risks include monetary policy actions that “miscalculate the right stance to reduce inflation;” energy and food price shocks; country debt distress; gas supply actions by Russia; a resurgence of COVID-19; a worsening of China’s property sector that spills over to banking that could have negative cross-border effects; and, geopolitical “fragmentation” could lead to trade and capital flow impediments.

(updated: 10-12-22)

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