“This bipartisan legislation takes important steps to improve our nation’s financial regulatory system,” Tim Pawlenty, chief executive of the Financial Services Roundtable, said in a letter this week to Senate leadership.
The legislation, sponsored by Sen. Mike Crapo (R-Idaho), chairman of the Senate Banking Committee, cleared a key procedural vote Tuesday with bipartisan support. The bill is expected to gain final approval in Senate this week but still must be approved in the House, where some Republicans have said the legislation doesn’t go far enough to roll back bank regulations. The House passed legislation last year that would repeal larger chunks of Dodd-Frank, so proponents’ biggest remaining challenge may be to reconcile the House and Senate versions.
“Get ready, folks — the moment we’ve been waiting for is about to arrive,” Camden Fine, head of the Independent Community Bankers of America, told members last week.
Here are five of the most significant aspects of the Senate legislation:
How big is big? Currently, banks with more than $50 billion in assets are considered “too big to fail” and undergo the strictest regulatory scrutiny, including a yearly stress test to prove they could survive another period of economic turmoil. The proposed legislation 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.
Community and regional banks have long complained that the regulations are excessive and saddle them with extra compliance costs they don’t deserve. The change would give them more control over how much capital they keep, whether they issue dividends to shareholders or buy back stock. The Federal Reserve would retain the ability to apply extra scrutiny to some financial institutions, but overall the bill would reduce the number of banks considered “too big to fail” from 38 to 12.
“Our banks do not threaten U.S. financial market stability, and we should not be subjected to the same regulatory regime as larger banks with more complex and interconnected business models,” more than a dozen banks, including American Express and Ally, said in a letter to Crapo and Sen. Sherrod Brown (Ohio), the Banking Committee’s ranking Democrat, on Monday. “Regional and traditional lenders and our communities have been disadvantaged by a regulatory model that lumps us together with the largest, most complex banks.”
Democrats and consumer groups note that it wasn’t just the country’s biggest banks that needed taxpayer bailouts during the financial crisis. American Express and Ally Financial, which could be helped by the legislation, for example, received $3.4 billion and $17.2 billion in taxpayer bailouts, respectively. The failure of smaller banks also contributed to the economic turmoil that rocked the financial system, the critics say. Loosening regulatory oversight of these institutions could put taxpayers at risk again, they say.
A Wall Street carve-out? A key aim of Dodd-Frank was to ensure that banks have enough capital to withstand another period of economic turmoil without needing a taxpayer bailout. But some banks, such as State Street and Bank of New York Mellon, have complained that requirements are too tough. These financial institutions, known as custody banks, primarily take in money from hedge funds or large asset managers, not Main Street customers, and say the requirements are unfair to them.
The Senate bill would soften the capital requirements for such banks. While huge — State Street has more than $2 trillion in assets, and Bank of New York Mellon has more than $1.7 trillion — they do not pose the same level of risks as other banks, supporters of the bill say.
But some Democrats and advocacy groups worry that big banks, such as Citigroup and JPMorgan Chase, could find a way to exploit the exemption for their benefit. Citigroup has been pressing lawmakers to expand the bill’s language so that other banks could take advantage of the provision, according to the Intercept.
Supporters of the bill say Citigroup will not benefit from the changes. In a statement, Citigroup said, “As Congress has sought to make a common sense change to the way capital rules treat custody assets, we have asked that they apply that change to all custody banks to maintain a level playing field in this important business.”
The Volcker rule. The legislation would also offer small banks relief from one of the most controversial aspects of Dodd-Frank. The “Volcker rule,” named for former Federal Reserve chairman Paul Volcker, bars banks from making risky wagers with their own money. The rule has been criticized as being too cumbersome and time-consuming.
The Senate bill would exempt small financial institutions with less than $10 billion in total assets from the rule. Such institutions do not engage in the type of risky trading that the rule aims to curb, the industry says. But leaders of at least one powerful banking regulator, the Federal Deposit Insurance Corp., say the exemption could allow risks to creep back into the financial system. “I think this would be a loophole,” FDIC Vice Chairman Thomas Hoenig told the Wall Street Journal in an interview. “It does open a door.”
In a letter to Brown, the Senate Democrat, Volcker said, “I know from my long experience in banking and savings and loan regulation that plausibly small loopholes can be ‘gamed’ and exploited with unfortunate consequences.”
Mortgage data. The legislation also offers small and regional banks relief from some of the restrictions on mortgage lending put in place after the financial crisis. It would be easier, for example, to offer a loan that meets federal standards.
But Democrats and some advocacy groups are concerned that the bill would also get rid of a requirement that banks report more data on whom they lend money to. This data helps regulators spot potential discrimination against minorities, they say. The Senate bill would exempt banks that make 500 or fewer mortgages a year from additional reporting requirements.
The Senate bill “would allow for the return of many of the same lending practices that caused the mortgage meltdown,” said Yana Miles, senior legislative counsel for the Center for Responsible Lending, a research and policy group that seeks to curb predatory lending.
What about the CFPB? The Senate legislation is as significant for what it doesn’t do as what it does. When the House passed a major rollback of Dodd-Frank last year, it included measures to weaken the Consumer Financial Protection Bureau. That was important to Republicans who say the bureau, created under Dodd-Frank, has been too aggressive and needs to be reined in. The House legislation, for example, stripped the CFPB of its power to write major rules regulating consumer financial companies, such as debt collectors, without getting approval from Congress.
But that legislation failed to gain traction in the Senate, in large part because of its attack on the CFPB. That was a nonstarter for Democrats who have lashed out at any efforts to weaken the agency. To attract Democratic sponsors in the Senate, the Crapo bill is silent on one of Republicans’ biggest gripes, the power of the CFPB.