Highlights of the Senate banking bill
The Senate delivered a striking victory Wednesday to the nation’s banks by voting to scale back key regulations imposed under the Obama administration.
The bipartisan legislation would soften the Dodd-Frank Act, the law enacted to prevent another market meltdown after the 2008 financial crisis.
Story Continued Below
The bill, which faces an uncertain fate in the House, has been mainly sold as an effort to benefit small banks, especially those that serve rural America. Yet it would also aid many larger lenders on the premise that they face more regulation than their risks require. Critics like Sen. Elizabeth Warren (D-Mass.) say the legislation would expose consumers to unsafe financial products and increase the risk of bank failures.
“There was effectively a moat put around the Dodd-Frank Act during the Obama administration,” Compass Point analyst Isaac Boltansky said. “In many ways this bill is the first time the drawbridge is coming down. It’s significant — as a mile marker, and because it allows for a broader conversation about what works in the law and what doesn’t.”
Here are the highlights of what the Senate legislation would do:
1. Big regional banks get a break
The provision that’s getting the most attention is a big deal for some household names in banking, such as American Express, Fifth Third and SunTrust.
It would allow the companies to escape rules that were intended to prevent the failure of the nation’s biggest banks. Among the safeguards that would be scaled back are the so-called stress tests that the Federal Reserve conducts to determine whether lenders have enough capital to operate through the next crisis. The bill would give them more flexibility to decide where to spend their money.
Why is Congress doing this?
Under current law, the “enhanced” rules are triggered once a bank grows large enough to have $50 billion in assets. Critics have argued that the simple numerical threshold is arbitrary and has been an impediment to matching up a bank's potential risks with appropriate regulation. Lawmakers from both sides of the aisle, as well as influential regulators, have argued that the threshold should be raised. Among them: former Rep. Barney Frank, the Democrat whose name is on the original bill that‘s being targeted.
The Senate bill would attack the issue in two ways. Banks with $50 billion to $100 billion in assets would get an immediate exemption from stricter oversight. Banks with $100 billion to $250 billion in assets would also get an out, though the Federal Reserve would have the option to keep tougher regulations on them, and the companies would continue to be subject to periodic stress tests.
“It removes to some extent the scrutiny the Federal Reserve has over a big group of banks,” Capital Alpha Partners director Ian Katz said. "Most banks don't like having the Fed pay very close attention to them."
The Congressional Budget Office, which analyzed the bill, said the proposal would “increase the likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail.”
2. Small lenders break free
The bill contains several rollbacks for the smallest banks and credit unions, which have complained for years that they were unfairly swept up by rules intended to crack down on Wall Street.
The magic number is $10 billion. Thousands of banks and credit unions with assets below that number will receive easier treatment under federal regulations intended to make sure they can weather downturns and don’t peddle risky mortgages. That includes removing requirements to prove they don’t engage in speculative trading.
One of the bill’s most controversial proposals would scale back a requirement for banks to report mortgage data that consumer advocates say is critical for identifying housing discrimination.
The bill’s backers have tried to make the community bank provisions the centerpiece of their case, arguing that the legislation would ease bottlenecks for mortgages and business loans, particularly in rural areas. Red-state Democrats helped draft the legislation.
While it’s a politically safe pitch, it’s unclear what the benefits will ultimately be for consumers, since it’s not clear the demand for loans is there.
“There is a fair case to be made that this bill will ultimately lower the compliance costs for the country's smaller banks and provide them the latitude to lend,” said Boltansky. But “it's still a question as to whether there will be a borrower who wants to borrow.”
3. Don't be fooled: Even the biggest banks win
While the bill's supporters have tried to debunk the idea that it would help Wall Street, the legislation would clearly deliver benefits to the largest banks, including JPMorgan Chase and Citigroup.
One provision would make it easier for giant banks to buy municipal debt to satisfy post-crisis rules requiring them to hold assets that they can quickly turn into cash during a meltdown.
Another section would ease a regulation for so-called custodian banks that handle trillions of dollars in assets for pensions, mutual funds and other companies for safekeeping.
The rule is intended to ensure that banks have some capital to guard against losses on their assets, regardless of how risky they are.
The bill would change that by no longer requiring custodian banks to have a capital cushion for cash deposited at the Federal Reserve. The big question is whether this provision will also apply to megabanks like JPMorgan and Citi, which are not labeled custodian banks, but do provide such services.
The bill’s authors say it would not benefit the two lenders, but the question looms over the legislation.
“We would all be better off if we left that to the Fed,” said Sen. Bob Corker (R-Tenn.), who proposed eliminating the provision altogether.
4. Foreign banks left out — or are they?
Progressive Democrats led by Sen. Sherrod Brown (D-Ohio) have warned that raising the threshold for tougher regulation on midsize and regional banks might also mean laxer oversight of big European banks like Deutsche Bank and Santander that have subsidiaries in the U.S.
The bill’s sponsors insist the concerns are unfounded, though they added a last-minute “clarification” to the bill to try to resolve the issue.
Brown and his allies still aren’t convinced.
“This is a fig leaf of protection to try and convince the public that this bill doesn’t do what it actually does,” Brown said on the Senate floor on Monday. “The legislation doesn’t require the Fed to do anything, and it doesn’t stop the foreign banks from suing if the Fed doesn’t obey their requests.”
5. Consumers get something (but so does Equifax)
Consumers will see some direct benefits from the bill.
For the first time, credit-reporting companies Equifax, Experian and TransUnion will be required to provide free credit freezes to all consumers and free credit monitoring services to active-duty military — potentially helpful tools to alert Americans to fraud and identity theft.
The proposals follow the gigantic data breach that Equifax disclosed last year. The fallout from the cyberattack compromised the personal information of as many as 148 million consumers.
While the bill appears to be a loss for the credit-reporting companies, they were able to secure a couple significant lobbying victories.
Military members who receive free credit monitoring will not have the right to sue the companies if there is a problem with the services. In addition, the bill would help the companies expand a credit score offering they want to provide for home mortgage applicants.
The bill would also introduce new student loan safeguards as well as protections for veterans refinancing their mortgages. And it would permanently extend a policy that temporarily shields military personnel from foreclosure proceedings after they leave service.