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What Ben Carson and Jeb Bush Actually Got Right About Bank Regulation in the GOP Debate

Republican U.S. presidential candidates Bush, Trump, Carson and Cruz shake hands at the conclusion of the debate held by Fox Business Network for the top 2016 U.S. Republican presidential candidates in MilwaukeeRepublican U.S. presidential candidates Bush, Trump, Carson and Cruz shake hands at the conclusion of the debate held by Fox Business Network for the top 2016 U.S. Republican presidential candidates in Milwaukee
Ben Carson and Jeb Bush shake at the conclusion of the debate held by Fox Business.Photograph by Jim Young — Reuters

Tuesday evening’s Republican debate featured a lengthy section on financial regulation; more than any of the three previous debates.

There were a lot of missteps, as a number of commentators have pointed out. Both Jeb Bush and Macro Rubio said that Dodd-Frank, the financial regulation passed after the financial crisis, was killing small community banks. That’s been a talking point of Republican politicians for a while, but it’s hard to prove. I tackled the “Dodd-Frank is killing small banks” myth back in 2012, when Mitt Romney brought it up during his debate with Barack Obama. The truth is that small banks are dying, but they have been dying for a while. As American Banker points out, since the 1980s about 3.5% of all banks in the U.S. have been bought out or closed each year. Since 2010, when Dodd-Frank was passed, the annual die-off rate of banks has risen, but only to 4% of all banks. And that small increase is probably the result of the hangover from too much lending in the run up to the financial crisis, not because of increased regulation.

Carly Fiorina said that the Consumer Financial Protection Bureau has no Congressional oversight, which is not true, or at least not any more the case than it is for other regulatory bodies, like the Federal Deposit Insurance Corporation or the Federal Reserve. And Rubio said that the large banks are happily going around and telling people they are too big to fail. But Jamie Dimon of JPMorgan Chase, arguably the epitome of too big to fail banks, isn’t. He regularly says his bank isn’t too big to fail. He also said he doesn’t like the idea of banks being bailed out.

But not everything the Republican candidates had to say was wrong.

1. Ben Carson: Stock buybacks helped cause the financial crisis.

Ben Carson was taken to task for this comment. But he’s right. Stock buybacks was one among several factors that led to the financial crisis, or at least made it worse. In the four years leading up to the financial crisis, the nation’s largest banks bought back $300 billion worth of stock. Those repurchases reduced the capital banks had on hand to cover loans, because the cash went out the door rather than accumulating on bank balance sheets. Worse, a number of banks borrowed to raise cash for buybacks, which further increased leverage. The buybacks were only a part of the banks’ effort to drive up returns by reducing capital, but it was part of it. And regulators have recognized that buybacks were part of the problem. Stock buybacks are a key factor in the Fed’s annual bank stress test.

That being said, Carson seemed to be talking about stock buybacks in general, not just at the banks. Stock repurchases are at an all-time high. And there has been a fair amount of handwringing about that. But the complaints have focused on how stock repurchases could be slowing the economy because the money would be better spent elsewhere. Not because it might cause the next financial crisis.

2. Jeb Bush: Forcing banks to have higher capital could put an end to bailouts.

Bush got a lot of push back from the WSJ’s Gerard Baker about his statement that we could avoid a financial crisis forever. That’s probably not true. But what is broadly true is that the banks were allowed to operate with very little capital, and that’s one of the reasons we had a financial crisis. Forcing banks to hold more capital will make bailouts less likely. Bush also said that higher capital ratios could end too big to fail, and that’s sort of true, but not on its own. More capital alone wouldn’t solve too big to fail. But if capital requirements were high enough, and based on a bank’s size, then some of the nation’s biggest banks might decide being big isn’t worth it and opt to shrink. That has sort of happened, but not nearly enough to claim that too big to fail is still not a thing.

Bush erred when he implied that banks haven’t increased their capital. Since the financial crisis, bank capital ratios have more than doubled, to around 12% today. You can make the case that capital ratios are not high enough. But you can’t say that raising capital requirements was not a focus of Dodd-Frank or regulators since the financial crisis. Regulators in the past few weeks have passed new rules that will effectively raise the amount of money that banks are required to hold to cover bad loans. One of the primary reasons cited for the new rules? To put an end to bailouts.

3. Jeb Bush: We have a higher concentration of risk in assets.

Asset concentration at the banks has increased since Dodd-Frank. The good news is that the asset that banks have piled into the most over the last few years is likely the least risky one: U.S. Treasuries. The nation’s largest banks now hold over $2 trillion in U.S. Treasuries. And Bush is right. The fact that banks hold a lot more of their money in Treasuries, and cash, is because of Dodd-Frank and other regulations passed since the financial crisis. And you can make the case that banks loading up on Treasuries could cause the next financial crisis, I guess if that drove U.S. lending rates down and caused the government to borrow so much money that it defaulted. But my guess is this is safer than banks owning, say, synthetic mortgaged-backed CDOs.