The Washington PostDemocracy Dies in Darkness

Senate passes rollback of banking rules enacted after financial crisis

The Senate passed a rollback the 2010 banking legislation known as Dodd-Frank on March 14. (Video: Elyse Samuels/The Washington Post)

The Senate on Wednesday passed the biggest loosening of financial regulations since the economic crisis a decade ago, delivering wide bipartisan support for weakening banking rules despite bitter divisions among Democrats.

The bill, which passed 67 votes to 31, would free more than two dozen banks from the toughest regulatory scrutiny put in place after the 2008 global financial crisis. Despite President Trump’s promise to do a “big number” on the Dodd-Frank Act of 2010, the new measure leaves key aspects of the earlier law in place. Nonetheless, it amounts to a significant rollback of banking rules aimed at protecting taxpayers from another financial crisis and future bailouts.

In a statement, White House press secretary Sarah Huckabee Sanders praised the legislation’s passage. “The bill provides much-needed relief from the Dodd-Frank Act for thousands of community banks and credit unions and will spur lending and economic growth without creating risks to the financial system,” she said.

Given the bipartisan support for the bill, Wednesday’s passage was expected. But for the first time since Trump became president, the divisions lurking within the Senate Democratic Caucus burst into full view, with Sens. Elizabeth Warren (Mass.) and Sherrod Brown (Ohio) leading vehement opposition to the bill, even as supporters — including Democrats up for reelection in states Trump won — supported it with equal vigor.

Warren and Brown argued the bill amounts to a gift to Wall Street that increases taxpayer risk while boosting the chances of another financial crisis. Supporters of the legislation — including endangered Democratic Sens. Heidi Heitkamp (N.D.), Joe Donnelly (Ind.) and Jon Tester (Mont.) — disputed that characterization, contending that the bill’s aim is to loosen onerous regulations on local banks and credit unions, freeing them to focus more on community lending, particularly in rural states.

“It is a bill that I am in­cred­ibly proud of,” Heitkamp said in a Senate floor debate this week. “Dodd-Frank was supposed to have stopped too big to fail, but the net result has been too small to succeed. The big banks have gotten bigger since the passage of Dodd-Frank, and the small banks have disappeared.”

House Minority Leader Nancy Pelosi (D-Calif.) called attempts to change Dodd-Frank banking regulations "a cause for alarm" on March 8. (Video: Reuters)

Following Heitkamp on the floor, Warren condemned the legislation as “the bank lobbyist act” and said it “puts American families in danger of getting punched in the gut.”

“Washington is poised to make the same mistake it has made many times before, deregulating giant banks while the economy is cruising, only to set the stage for another financial crisis,” Warren said.

Senate Minority Leader Charles E. Schumer (D-N.Y.) opposed the legislation but has played little role in a debate that has allowed liberals and moderates in his caucus to stake out positions tailored to their own political needs. But after Warren called out red-state Democrats and other supporters of the bill by name in a fundraising appeal, Schumer encouraged her to stay focused on the substance in the debate, according to a person familiar with the exchange who requested anonymity to discuss it.

Few of the Democrats named by Warren wanted to comment publicly on dissension within the caucus. Heitkamp downplayed their disagreements, saying of Warren in an interview, “She feels very, very strongly about this. I think it’s a difference between where we’ve always been on these banking issues. And you know obviously as you’re moving the bill forward, these differences were going to come to a head, and we were going to see a conflict because I just don’t see the bill the way she does.”

It’s not clear whether the Democratic divisions laid bare by the banking bill will resurface anytime soon, given the light legislative schedule expected in the Senate for the remainder of this midterm election year. But the debate highlighted how the political imperatives for red-state Democrats can collide with those of liberals such as Warren, who’s seen as a potential presidential candidate in 2020, creating the potential for conflict that could flare anew in future.

Banks with more than $50 billion in assets are now considered “too big to fail” and are subject to the toughest regulations, including a yearly stress test to prove they could survive another period of economic turmoil. The Senate legislation, shepherded by Banking Committee Chairman Mike Crapo (R-Idaho), would raise that threshold to $250 billion in assets, potentially allowing several high-profile financial institutions, including American Express, Ally Financial and Barclays, to escape the extra regulatory scrutiny.

The bill’s supporters say these banks have been unfairly saddled with regulations originally intended for global behemoth banks such as JPMorgan Chase, not regional or midsized firms. Lifting the restrictions would save the industry billions a year in compliance costs, industry analysts say. It would also make it easier for them to reward shareholders with dividends and stock buybacks, they say.

Democrats and advocacy groups warn that the push to loosen the regulations fails to recognize that many of the midsized institutions that would be helped by the Senate legislation fell into dire financial straits less than a decade ago and needed more than $40 billion in taxpayer bailouts. During a financial crisis, they say, banks tend to fail in tandem, suffering from similar ailments. And the failure of several in a short time period could strain the U.S. economy.

The bill has largely been marketed as long-overdue help for small community banks and credit unions. The legislation, for example, would exempt banks with less than $10 billion in assets from the “Volcker rule,” which bars banks from making risky wagers with their own money. The bill would also exempt many small banks from a Dodd-Frank requirement that financial institutions report more detailed data on whom they lend to. The industry has complained that both measures are too cumbersome and time-consuming.

Exempting small banks from the mortgage data requirement would weaken the government’s ability to enforce fair-lending requirements, making it easier for community banks to hide discrimination against minority mortgage applicants and harder for regulators to root out predatory lenders, consumer advocates say.

The bill still needs to be approved in the House, where Republicans have been pushing a more aggressive rollback of financial regulations. That chamber passed a bill last year that stripped the Consumer Financial Protection Bureau, created under Dodd-Frank, of much of its power, for example. But the future of the CFPB is not addressed in the Senate bill.

Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, has said that House Republicans will want to alter the Senate bill to reflect their priorities. But that could drive away the Senate Democrats needed to pass the legislation, and so the House will face significant pressure to accept the Senate legislation with few, if any, changes.

Although the banking bill marked the first bipartisan legislation of the Trump era aside from must-pass spending deals, it was far from a freewheeling debate on the floor. Because of disagreement between the parties that has become routine, no amendment votes were permitted, frustrating senators in both parties who hoped to advance favored policies.

Sen. Bob Corker (R-Tenn.), a member of the Banking Committee, had been pushing an amendment to strike a section of the bill that could reduce the capital cushions of five of America’s biggest banks. Though supported by liberal Senate Democrats, it never came up for a vote amid the wrangling over the amendment process.

Jeffrey Stein contributed to this report.