President Trump and his advisers boasted that they were going to repeal Dodd-Frank, the 2010 bank regulation law passed under former President Barack Obama. The big deregulation bill was going to be a centerpiece of Trump’s plan for boosting economic growth, to go along with tax reform and trade negotiations.
Trump and congressional Republicans got their big conservative tax overhaul. But they have lowered their ambitions for cutting financial regulations.
What remains of those hopes rests on a Senate legislative package, a bill supported by a dozen Democrats to be voted on this week, that would modestly relieve banks of some Dodd-Frank rules and spare some regional banks from some of the regulations that apply to Wall Street megabanks.
That latter goal, the part of the bill that has generated controversy, would be accomplished by raising the threshold at which the rules kick in from $50 billion in assets to $250 billion.
The higher threshold would mean that banks such as Cincinnati’s Fifth Third Bank, Atlanta’s SunTrust Bank, and Birmingham’s Regions Bank would see regulatory relief and less scrutiny from the Federal Reserve.
Those regional banks must face “stress tests” in which regulators examine what would happen to their balance sheets if they ran into a simulated financial crisis. They are required to have to have a risk committee. And they have to put together “living wills” spelling out how they would pay out all their creditors without causing a panic if they failed. All those provisions require huge amounts of paperwork and compliance and give regulators sway over their business.
For what is likely a filibuster-proof majority of senators, including centrist Democrats such as Mark Warner of Virginia and vulnerable Democrats from Trump-won states such as Jon Tester of Montana, relief is necessary for regional banks, which are thought to play an important rule in financing small businesses.
Yet, the bill, led by Republican Senate Banking Committee Chairman Mike Crapo of Idaho, is one of the rare measures to split the Democratic caucus during Trump’s tenure.
Liberal Democrats are seeking to stop the bill by portraying it as a giveaway to Wall Street that endangers the financial system, on the basis that it provides relief to regional banks.
“The big bank lobbyists want you to believe that this bill is protecting poor little mom and pop banks from getting buried under red tape,” Sen. Elizabeth Warren, D-Mass., wrote in a fundraising email bashing the bill — and her fellow Democrats who support it. “But this bill is aimed at helping the big guys.”
Congress has long struggled to answer the question of whether regional banks are “big banks” in the same way that JPMorgan Chase and Citigroup are. The $50 billion threshold set by Dodd-Frank said that they are, for many purposes, although regulators also distinguish between the eight megabanks and other banks for some rules.
Regional bankers contend that they are not Wall Street banks and shouldn’t be regulated as such. They aren’t nearly as big as JPMorgan Chase, which has more than $2 trillion in assets, and their activities are closer to those of community banks than they are to the complicated financial dealings of Goldman Sachs or Morgan Stanley.
Yet, Senate liberals counter that the banks that would get relief under the Crapo bill are roughly 25 of the 40 biggest banks in the country and are all in the top 1 percent of biggest banks.
Furthermore, as Warren and allies such as Sen. Sherrod Brown, D-Ohio, have noted, regional banks were among those to fail and require bailouts. Brown, the top Democrat on the Senate Banking Committee, noted during the committee vote on the bill that banks with assets of between $100 billion and $250 billion received $239 billion in TARP funds.
Liberal lawmakers and outside regulatory hawks fear other parts of the bill would loosen regulations on big banks, such as a provision that would lower capital requirements for State Street and the Bank of New York Mellon, two major custody banks, meaning their main business is safekeeping assets for financial firms.
Much of the rest of the bill, though, includes provisions that would lessen regulatory burdens for small community banks by loosening rules on mortgages they hold in their portfolios, exempting them from the “Volcker Rule” restricting their trading activities, and more.
The bill is “largely, if not completely outside the [systemically important financial institution] designation area, a community bank bill,” said James Ballentine, head of the American Bankers Associations’ lobbying group.
There’s where the politics get tricky for Democrats. Relief for community banks has strong support on Capitol Hill.
Critics of Wall Street practices, however, don’t want to see rules lifted for big banks and would rather stop Congress from advancing measures that blur the line between relief for small banks and relief for bigger banks. For most of its seven-plus years on the books, Dodd-Frank has avoided all but relatively minor changes, thanks to Democrats’ resistance to going down the slippery slope of revising it.
In particular, liberal opponents of the Crapo bill fear that it could be amended at some stage to gain the support of the more conservative House Republican caucus, which House Financial Services Chairman Jeb Hensarling of Texas has said he will try to accomplish.
“There’s a good chance you’re going to see this bill get worse,” said Marcus Stanley, policy director for Americans for Financial Reform, a group that favors stricter financial regulation.
