The Senate could reduce regulations for small and midsized banks, but Wall Street may be out of luck.
House Republicans and the Trump administration want a major rollback of the 2010 Dodd-Frank financial reform law, including changes that would help the nation’s largest banks. But as debate shifts to the Senate, those changes are likely to be scaled back significantly because Republicans lack the votes to push many of them through.
“We will have an easier time getting bipartisan agreement at the smaller size level of institution,” Senate Banking Committee Chairman Mike Crapo (R-Idaho) told an industry trade group this week. “As you move up the size level for institutions, the ability to get bipartisan agreement diminishes. But it doesn’t go away.”
Crapo is working with the committee’s top Democrat, Sen. Sherrod Brown of Ohio, on a bill revising Dodd-Frank law that could draw enough Democratic support to prevent a filibuster.
Now the effort of the two senators is in the spotlight after the House passed a financial regulatory overhaul bill on June 8 and Treasury Secretary Steven T. Mnuchin weighed in with a lengthy report on Monday.
Brown vowed he and his fellow Democrats would not loosen the reins on large banks.
“Based on the current Wall Street reform debate, the activity in the House and the report put out by Treasury earlier this week, I am concerned that some seem to have forgotten that we even had a financial crisis at all,” Brown declared at a committee hearing Thursday.
“Let me be clear: Proposals to weaken oversight of the biggest banks have no place in this committee’s process,” he said.
One of the key targets of the House bill and the Treasury report is the Consumer Financial Protection Bureau, which would have its authority gutted.
The changes include making its director subject to removal by the president for any reason, eliminating the independent funding stream so Congress could reduce its budget, and stripping the agency of its ability to send supervisors into banks to make sure they are complying with consumer protection laws.
For Brown and Senate Democrats, changes like that amount to a poison pill for any legislation.
“What they want to do with the CFPB is emasculate it,” Brown said in an interview, declaring such changes to the agency “a huge problem” for bipartisan legislation.
Dodd-Frank was passed by Democrats in the aftermath of the 2008 financial crisis with almost no Republican support. The legislation, one of President Obama’s signature accomplishments, stiffened bank regulations, sought to avoid future bailouts by creating a process to shut down teetering financial giants, prohibited federally insured banks from engaging in risky trading for their own profit and created the consumer bureau to oversee credit cards, mortgages and other financial products.
Republicans and many in the banking industry said the regulations went too far. Trump has promised to dismantle Dodd-Frank and in one of his first executive actions ordered Mnuchin to conduct an extensive review.
Mnuchin delivered a 149-page report to Trump on Monday that recommended reducing oversight of large financial institutions and providing even more relief for smaller banks. In many ways, the Treasury report was similar to legislation from Rep. Jeb Hensarling (R-Texas) that passed the House last week with no Democratic votes.
Mnuchin noted that many of the changes could be made by the Federal Reserve and other agencies as Trump appoints new regulators. But major rollbacks, such as those directed at the consumer bureau, would require legislation.
In most cases, such legislation would require 60 votes in the Senate to overcome a likely Democratic filibuster. There are only 52 Republican Senators.
That makes major legislative changes unlikely, said Edward Mills, a financial policy research analyst with FBR Capital Markets & Co.
“The agenda that I’m focused on is anything that can be done through regulation or a vote in Congress that doesn’t require a single Democrat,” he said.
But there appears to be bipartisan desire to ease some regulations on small and midsized banks, which pose less risk to the financial system.
The Senate Banking Committee hearing on Thursday focused on those institutions, and lawmakers expressed optimism about legislative changes as they heard complaints from bankers about some of Dodd-Frank’s regulations.
Robert Hill, chief executive of South State Corp., which has 80 bank branches in South Carolina, North Carolina and Georgia, said his company faces more extensive oversight because its assets this year crossed the $10-billion level.
The increased regulatory costs, including now for annual stress tests, led the bank to close 10 branches, Hill said.
“I assure you that adding one dollar in incremental assets as we crossed $10 billion did little to change the risk profile of our company,” Hill told senators.
He urged senators to increase the $10-billion threshold. Mnuchin wants to raise the stress-test level to $50 billion in assets, and there appears to be bipartisan support for such a move.
When a bank has more than $50 billion in assets, it is considered a systemically important financial institution under Dodd-Frank and faces even tougher regulatory oversight, including more extensive stress tests and requirements to hold more capital.
Crapo and other Republicans agree with regional banks that the $50-billion threshold should be raised as well.
Harris Simmons, chief executive of Zions Bancorporation, the smallest of the 43 banks with more than $50 billion in assets, said the threshold was arbitrary and should be raised so that only the biggest banks are covered.
“The overlay of all of these regulations has made it Increasingly difficult to do business,” he said.
Mnuchin has recommended the $50-billion threshold be raised “to be better tailored to the complexity of bank holding companies.”
But Sen. Elizabeth Warren (D-Mass.) was critical of such a move, showing the difficulty facing Dodd-Frank changes in the Senate affecting larger banks.
She reminded Simmons that he had testified to Congress in 2006 against increased oversight for banks with a high concentration of commercial real estate loans. Two years later, the bank needed $1.4 billion in federal bailout money in part because of its commercial real estate exposure, Warren said.
Like nearly all the banks that were bailed out, Zions repaid the money. The bailouts stabilized the U.S. banking industry, which posted a record $171 billion in profits last year, according to the Federal Deposit Insurance Corp.
“Whenever things are going OK, the banks come in here and say, ‘Yay, let’s reduce the rules. What could possibly go wrong?’” Warren said. “And then when things go wrong, banks like yours line up and say to the taxpayers, ‘Bail me out.’ Our job is to make sure that we do not permit the next failure to happen because it helps short-term bank profits.”