The bill, which is scheduled for an initial Senate vote Tuesday and is expected to pass the chamber as soon as this week, would roll back some of the regulations Congress put in place after the 2008 financial crisis. A major feature of the bill is exempting about two dozen financial companies with assets between $50 billion and $250 billion from the highest levels of regulatory scrutiny from the Federal Reserve. If passed, it would be the most substantial weakening of the regulations put in place by the 2010 Dodd-Frank law that strengthened financial regulations.
The CBO report says those exemptions make it more likely a bank would collapse and lead federal officials to stabilize it with public funds. The CBO notes that this scenario is unlikely in any given year, but it says the bill makes it more probable.
“CBO's estimate of the bill's budgetary effect is subject to considerable uncertainty, in part because it depends on the probability in any year that a systematically important financial institution will fail," the report says. "CBO estimates that the probability is small under current law and would be slightly greater under the legislation.”
The truly biggest banks — Goldman Sachs, JP Morgan, CitiGroup — have balance sheets well beyond $250 billion, and will not benefit from that change. But other well-known banks would be freed of some supervision, including firms such as SunTrust Banks and Fifth Third Bankcorp that received government bailouts to survive the financial crisis.
CBO’s report comes as supporters and detractors of the bill argue about whether it promotes economic growth or economic instability.
Supporters of the bill, which is backed by Republican leadership and 13 Senate Democrats, argue it offers meaningful relief to small credit unions and regional banks without encouraging the risky gambles that contributed to the Wall Street meltdown about 10 years ago.
Spokespersons for Sen. Mike Crapo (R-Idaho), the bill's lead sponsor and chairman of the Banking Committee, were not immediately available to comment on the report. But Crapo earlier on Monday defended his bill.
"My first response to that is this bill is anything but a deregulation of Wall Street," Crapo said. "If you look at the provisions in this bill, banks above $250 billion are not totally untouched, but almost untouched, in the provisions of the bill. And so we didn't even get all of the regional banks included in this bill."
Detractors say it would loosen regulations and encourage large financial firms to take excessive risks.
"This banking bill is a disaster. The Wall Street crash of 2008 showed the American people how fraudulent many of these large banks are. The last thing we should be doing is deregulating them," Sen. Bernie Sanders (I-Vt.) said in a statement. "As the Congressional Budget Office reported today, the bill that the Senate will be considering this week will 'increase the likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail.' Why would any member of Congress vote to move us closer to another taxpayer bailout of large financial institutions?"
The proposed changes for the midsize banks include less stringent regulations on submitting plans for winding down if they fail (plans known as “living wills”); looser liquidity rules, which mandate that banks have easy access to safe capital in case their loans go south; and less frequent “stress tests,” which gauge how prepared a bank is for a financial crisis. These new oversight measures were a new feature created by Dodd-Frank, and former regulators say they are essential for curbing excessive risk-taking.
Erica Werner contributed to this report.