The first meaningful bipartisan moment for Congress in the Donald Trump era likely won’t be an agreement over immigration, guns, health care or taxes.
Instead, it looks like it will be an agreement to ease the way for banks to get bigger: last Tuesday, 67 Republicans and Democrats in the U.S. Senate voted to advance legislation that would roll back regulations outlined in the 2010 Dodd-Frank financial reform law.
The bill, dubbed the Economic Growth, Regulatory Relief, and Consumer Protection Act, is being touted as the product of years of negotiating between Republicans and centrist Democrats. It hardly constitutes the aggressive undoing of Dodd-Frank that many Republicans have craved, but it significantly reduces the number of banks deemed “systemically important,” or “too big to fail,” thus freeing them from stricter federal oversight.
The bill’s proponents, particularly its Democratic ones, prefer to focus on its provisions to make life easier for community banks and credit unions, the number of which have dwindled in recent years, by improving their ability to provide credit to customers and freeing them from some regulations.
But other Democrats say that the bill is mostly a victory for big banks, who spent years lobbying for changes to Dodd-Frank, and who will now be exempted from regulations aimed at preventing another financial meltdown.
Despite the dissent from some on the left, and on the right, this modest run at reworking Dodd-Frank is likely to have the support required to eventually get President Trump’s signature. What’s less clear, at this point, is whether this effort represents a first step or a high water-mark for financial deregulation in the Trump era.
Too bigger to fail
Dodd-Frank was one of the most significant achievements of Barack Obama’s presidency: passed to help ensure that a financial crisis like the one that unfolded over 2008 and 2009 would never happen again, the law also aimed to prevent more routine abuses in the financial sector by establishing a watchdog agency, the Consumer Financial Protection Bureau.
The bill set to advance out of the Senate leaves the CFPB, loathed by most Republicans but generally popular with the public, unscathed. Instead, the legislation targets federal oversight of the country’s biggest banks, a move that could have some far-reaching consequences.
Under Dodd-Frank, financial institutions with more than $50 billion in assets were subject to stricter supervision by the Federal Reserve Bank. As of September 2017, that list included giants like JPMorgan Chase ($2.1 trillion in assets) as well as smaller, regionally based banks like First Republic Bank ($84 billion in assets), which has most of its branches on the West Coast.
The Fed was regulating these powerful, but still relatively smaller banks like First Republic with some of the same tools it was using to regulate institutions like Citigroup, whose aggressive practice of lending subprime mortgages played a part in the financial crisis and ultimately earned them a $7 billion fine from the federal government in 2012. One element of that regulatory program is the so-called “stress test,” in which the Fed occasionally conducted in-depth examinations of how a particular institution might weather a financial crisis event.
Dodd-Frank also placed restrictions on capital liquidity for banks with assets over $50 billion, meaning that these banks were required to keep more assets on hand relative to their debts. That was aimed at insulating them in the event of a financial crisis, and limiting the likelihood that the feds would have to orchestrate a costly, taxpayer-funded bailout of financial institutions, as they did in 2008.
The financial industry chafed at these restrictions, particularly on the mid-sized banks, claiming they were burdensome and costly to comply with. Former Rep. Barney Frank, the Massachusetts Democrat who was the House architect of Dodd-Frank, later conceded that the $50 billion threshold outlined in his law was too low.
The Senate’s legislation proposes a new threshold for deeming banks “systemically important,” and therefore subject to greater scrutiny: $250 billion or more in assets. That would place Dodd-Frank’s toughest provisions on a small group of just 10 banks, while freeing 25 institutions from those regulations — including Goldman Sachs, Morgan Stanley, and Ally.
It’s that piece of the Senate bill that most incenses progressives. Massachusetts Sen. Elizabeth Warren, an anti-Wall Street crusader, declared on Twitter after the vote to advance the bill that “the Senate just voted to increase the chances your money will be used to bail out big banks again.” She called out the 17 Democrats who voted in favor of the legislation, many of whom are on the ballot in November in states won by Donald Trump. (Minnesota DFL Sens. Amy Klobuchar and Tina Smith both voted no.)
Backing up some Democrats’ arguments, an analysis from the nonpartisan Congressional Budget Office found that the Senate bill increases the likelihood of failure for banks valued between $100 billion and $250 billion.
Progressive advocacy groups have cast the bill in far harsher terms. Bart Naylor, an analyst with the nonprofit group Public Citizen, said the bill “in its broadest strokes is all about deregulating Wall Street. This will be the biggest banking bill that is going to pass since 2010, when Dodd-Frank was passed.”
Small banks say this bill is for them, not Wall Street
While progressives cast the bill as a product of Wall Street and its lobbyists, representatives of smaller banks said the legislation provides long-awaited relief from complying with complex and unnecessary Dodd-Frank regulations.
In the years since Dodd-Frank’s passage, the number of community banks and credit unions in the U.S., generally defined as institutions with less than $10 billion in assets, has declined. One estimate found that 400 community banks shuttered between 2008 and 2012, and that four disappear each week, usually by merging with another bank.
Members of Congress, particularly Republicans, have attributed that decline to the stifling nature of federal regulation, while others have pointed to long-term trends of corporate consolidation.
Joe Witt, president of the Minnesota Bankers Association, a group which represents nearly all of Minnesota’s roughly 700 banking and financial institutions, says the Senate’s bill has a lot to offer his members, who have an average of $100 million in assets.
“These small, community banks shouldn’t be regulated as if they’re Citigroup,” Witt told MinnPost. “We’re pleased to see any action like this bill, that will recognize that not every institution needs to be regulated exactly the same.”
Witt says the Senate’s legislation would make it easier for smaller banks to provide loans, and save them time by freeing them up from figuring out compliance with capital and liquidity rules designed for larger banks. “There’s probably a dozen provisions in this bill that would help us a lot” he said.
“1,000 pages of capital rules don’t make a lot of sense when you’re a small community bank,” Witt continued. “This rule would require the regulators to come up with much more simplified capital standards with banks that have $10 billion or less.”
Naylor, with Public Citizen, went after arguments the bill would provide help that is actually needed for community banks. “It’s rich for community bankers to bemoan the loss of community banks, because they’re the ones selling out,” he said, pointing to merger rates. “By raising the threshold for enhanced supervision to $250 billion, you’re simply encouraging more bank mergers.”
Given the aversion to loosening regulations for bigger banks, why did the architects of the Senate bill pair those provisions with measures to boost small banks, something most lawmakers would enthusiastically support?
To critics of the bill, the aid for smaller banks is a way to give lawmakers who voted for the bill a shield for criticism, as they implement an agenda friendly to bigger banks, many of whom are influential donors to politicians in both parties, and are active participants in Washington lobbying.
Large banks in the $50 billion to $250 billion asset range that would be affected by the bill, such as BB&T, SunTrust, and Capital One, all spent at least $1 million in 2017 lobbying on legislation in Congress — and a focus of that lobbying activity was rolling back Dodd-Frank.
“Apparently, members of Congress feel obliged to do some favors now and then,” Naylor says. “They have been making promises to donors for years now that they’d get something done.”
House would go farther
The U.S. Senate is expected to vote on final passage of the bill this week. That chamber’s bipartisan achievement will be put to the test in the U.S. House, which is more averse to compromise and where more conservative attitudes about Dodd-Frank prevail.
Last year, the House passed a Dodd-Frank rollback of its own, dubbed the Choice Act. That bill, which passed on a party-line vote, represented a sweeping rebuke of the Wall Street reform law. Not only did it weaken “too big to fail” regulations, it repealed the so-called Volcker Rule, which prohibits banks from making certain types of risky investments, ended the bailout procedure outlined by Dodd-Frank and defanged the Consumer Financial Protection Bureau.
Legislation that looks more like the Choice Act is the wish of the financial industry, and of Republican lawmakers like 2nd District Rep. Jason Lewis, who believes in reforming the bailout process. But Lewis told MinnPost “we’ve gotta do something because the community banks are getting killed. I am sympathetic to giving them some relief.”
Texas Rep. Jeb Hensarling, the chair of the House Financial Services panel and the architect of the Choice Act, has issued a list of changes he’d want to make to the Senate legislation, which would bring it closer to the legislation he helped pass. But given the realities of Congress — the Choice Act is a total non-starter in the Senate — it seems increasingly likely the House will take something more like the half-loaf represented by the Senate’s effort, rather than holding out for the whole loaf.
Most Democrats in the lower chamber are poised to vote no. DFL Reps. Keith Ellison and Tim Walz both told MinnPost they would not vote for anything that weakens Dodd-Frank regulations on large banks.
The bill, Ellison said, would introduce greater risk into the system. “Isn’t this why we passed Dodd-Frank in the very beginning?” he asked.
‘A first step’
If the bill passes the House, it’s possible President Trump could sign it into law by summer. Opinion is divided as to whether that would represent the crown jewel of efforts to roll back Dodd-Frank, or just the beginning.
Public Citizen’s Naylor says that if Democrats take back Congress in the November midterms, or significantly dent GOP majorities, it’s highly unlikely anything stronger than the Senate bill could pass out of Congress.
“Ideally this will be it,” he said, “at least for the year 2018.”
Bank advocates like the MBA’s Witt hope for the opposite. “As much as we like this bill in and of itself, we really do like to hear [lawmakers] talking about this being a first step,” he said.
Indeed…
There’s little partisanship in the service of money, and People of Money, There’s no sense of shame on the part of those who do so, though there should be.
This is insane
How quickly we forget the Great Recession given to us by banks and the inept repubs and now we’re repeating this inane behavior?
We need to rid ourselves of these corrupt politicians whose only value is their wealthy benefactors…and we need to change our laws to rid ourselves of the corruption given to us by Citizens United which allowed almost unlimited funding in our elections.
Boy o Boy . . . let’s let bankers off the hook
Memories are very short these days especially among politicians.
Already the fabulous Christmas present tax bill last year is showing how shoddy
its provisions and the problems that will hurt thousands of taxpayers and companies.
Is anybody counting the victims of these legislative nightmares? What’s the rush to
help some by hurting so many others. All Bills should have a mandatory victim estimate along with
an analysis of the victimization to be perpetrated.
……….” And Consumer Protection Act”
.Just had to throw that into the title in an attempt to appease the skeptics.
How to Lose an Election
Why campaign against Wall Street and the banksters when you can pass their bills instead?
This is how Democrats lose elections, by being Republican Light. Given a choice between a real Republican and Republican Light, Light loses every time. Way to motivate the base, guys.
So:
As noted by others and Sam, what’s new? Crumbs to the common man and cake to the wealthy! You know we seem to be getting pretty close to that Oligarch country “T” wants. This is just another step in that direction. We all know the Republican mantra , nothing better than finding another way to rob the common man, and corrupt laws is their stock and trade way of doing it.
What’s Not New
Is that the GOP is on the side of Wall Street. Also, that some Democrats are firmly on the side of Wall Street. What is new, is that Democratic voters are expecting progressive values from their politicians.
Democrats For Wall Street? Not a winning campaign slogan.
As Lee Iaccoca once said: lead, follow, or get out of the way!
A Bank Examiner’s Perspective
I worked as a federal bank examiner for 12 years, and I examined banks of all sizes. The most important regulation we should have is to once again separate the consumer and commercial (C & C) banking operations from the investment banking operations. C & C operations – lending and investing in low-risk bonds – are funded almost entirely by FDIC-insured deposits. The federal government will never, ever allow the FDIC fund to be depleted, so that FDIC insurance is really backed by the full faith and credit of the U.S. Government.
Investment banking is about higher risk debt and equity financing – activities that should NOT be effectively guaranteed by government. All the risky stuff should be done by people and entities who face possible losses all on their own.
The Dodd/Frank Act did nothing
to help with too big to fail but hurt small banks and credit unions. Between more red tape, regulations, restrictions on lending, hiring regulators and in general making it harder on small loaning companies Dodd-Frank was wrongheaded from the start. Too big to fail is just as big or bigger after “consumer watchdogs” wrote the bill and was blindly passed by Congress.
Thanks goodness a group of legislators on both sides of the isle can repair this flawed legislation.
The purpose of Dodd-Frank
was basically to put an end to the practice of taking shaky mortgages at face value. A lot of those “small” lenders were making such loans to collect the fees and then resell them to banks who were looking for something to sell to investors in the form of securities. Banks now have to do a better job of making sure said mortgages aren’t so shaky. That said, the changes proposed to Dodd-Frank aren’t gutting it, and even Barney Frank has stated the $50 billion bank size threshold was too low. As these things go, I’m not going to lose sleep over it.
Good points
the “Done nothing” statement shows a lack of insight, If you shore up the dam to prevent it from leaking, you have “done nothing” because it wasn’t leaking. Perhaps some small banks got caught in the shuffle, why don’t we just treat them? Seems a fair amount of people forgot about the savings and loan crisis back in the 80’s and 90’s, now I wouldn’t call those guys the mega banks, but, they almost brought the system down then as well, It doesn’t take but a couple properly placed bad actors to topple the entire show!
Community Banks Are the Trojan Horse Here
If this is for community banks, why is Equifax getting immunity from lawsuits? Sen. Mike Crapo, sponsor of the bill, has an amendment that will prevent active duty military from suing Equifax, Transunion, and Experian. So who’s pro-America now? Equifax is a community bank? Seriously? Tellinng our freedom fighters they can’t be sued? Semper Fi, dude, Semper Fi.
This bill will weaken protections for 25 of the largest 38 banks, making a financial collapse more likely and more expensive. Twenty-five of the top 38? And I’m to believe that this is for community banks? I was born at night, but it wasn’t last night.
Foreign banks, like Deutsche Bank (now who owes that bank a small fortune?), will see their US subsidiaries deregulated. So now Deutsche Bank is a community bank too? Puh-leaze.
The aptly named Crapo bill exempt banks that make fewer than 500 mortgages/year from reporting mortgage data. That’s 85% of banks that make mortgages. And why do they want that? Because some of them have been getting into trouble for ripping off and not loaning to racial minorities. If no data is collected, there is no evidence for the Justice Department to prosecute. They whine that reporting data is too onerous. But there are these new things call “computers” and, well, never mind.
Last, profits for both community banks and large banks have been fine. This another sop to the point 1%.
That’s why we call it neoliberalism
The idea that Democrats actually represent some kind of liberal push-back on the demands of capital is a myth. This is why Clinton’s ties and speeches to Wall Street remained an issue, centrist Democrats simply don’t believe in the kind of regulation that’s necessary.
An obvious question arises for anyone who reads this article: If the regulations being revised currently apply to banks with $50 billion or more of assets, how can banks with less than $50 billion claim to be suffering under the burden of those regulation? It looks like we have small bankers complaining about having to comply with regulations that don’t apply to them in the first place, what’s up with that? My guess, based on decades of experience with such claims, is that small bankers are simply making a false claim. Mr. Witt appears to be complaining about thousands of pages of requirements that don’t apply to his “small” banks in the first place.
And I would remind everyone that “small” banks failed in much greater numbers than “large” banks during the financial collapse. 85% of the banks that collapsed during the Great Recession were considered “small” with assets of less than a billion dollars. And all those banks likewise were bailed out by taxpayers who financed FDIC. The whole idea that Dodd-Frank was effective regulation in the first place is a facile claim. Weakening Dodd-Frank can’t possibly be rational policy.