“WE’RE GOING to be doing a big number on Dodd-Frank,” President Trump promised in the early days of his administration, implying imminent achievement of the long-standing Republican goal of repealing, or gutting, the signature financial reform law of President Barack Obama’s tenure. What Mr. Trump neglected to mention, of course, is that the only relevant number, big or small, was 60: That’s how many senators it would take to pass new legislation. Republicans could change Dodd-Frank only to the extent consistent with attracting sufficient Democratic votes.
Now we’re finding out what the lowest common denominator may be. Judging by the bill moving through the Senate with bipartisan support, it is to grant regulatory relief to small banks while letting some big ones, but not the biggest, go along for the ride. Specifically, banks with less than $10 billion in assets would be exempt from the Volcker rule, a ban on trading risky securities; and the level of assets at which banks are considered systemically risky and subject to stricter capital requirements and other crisis-prevention rules would grow from $50 billion to $250 billion. The effect of the latter change would be to relax crisis-prevention controls on 26 of the 38 biggest banks in the United States, though the Federal Reserve could adjust that in certain cases.
The bill will certainly please much of the financial sector, especially politically influential community banks; but this is not the same as saying it is wise: The failure of one or more $200 billon banks could pose systemic risks. Nor is it necessary. Community banks — 92 percent of federally insured institutions — are generally doing fine, according to the latest Federal Deposit Insurance Corp. statistics, which show that lending grew among these institutions during 2017, and that fourth-quarter net income would have increased 17 percent from a year ago but for one-time income tax charges. Indeed, bank stability and profitability had both recovered in recent years under Dodd-Frank, as has the economy as a whole, thus calling into question the bank lobby’s claim that deregulation is vital to restored growth.
A case could be made that further toughening of capital requirements for the largest banks is in order and that Democrats should have insisted on it as the price of regulatory relief for small ones. Federal Reserve Bank of Minneapolis President Neel Kashkari advocates a 38 percent equity capital minimum — which could force the giants to break up. You don’t have to agree with Mr. Kashkari to worry nevertheless that the Senate bill sets a precedent for the biggest institutions to demand lower capital requirements the next time Congress takes up the issue.
For now, that doesn’t seem politically possible; the Senate bill could represent the high-water mark of this Republican deregulatory wave. The House financial deregulation bill, which really would gut Dodd-Frank, has no chance of attracting enough Democratic support to pass the Senate. Though weakened, the basic Dodd-Frank regulatory framework might just survive two years of Republican control of the presidency and Congress, which certainly beats the alternative.