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.