Biz groups fracture after Dodd-Frank rollback

The financial industry coalition that helped roll back the Dodd-Frank Wall Street reforms is fracturing.

Lobbyists for banks and credit unions are turning on each other, rekindling fights that have long divided them. It’s a swift turn after years that saw financial services trade groups largely united in pushing for regulatory relief.

That effort culminated in May when President Trump enacted the most sweeping changes to Dodd-Frank since then-President Obama signed the law in 2010.

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It was the biggest legislative victory for the industry in close to 20 years, freeing a slew of firms from some of the law’s strictest rules.

“It affected all of us,” said Dan Berger, president and CEO of the National Association of Federally Insured Credit Unions (NAFCU), about the unified effort.

“The policymakers didn’t really want to do a demarcation. It was just easier to include everybody.”

Now, though, the powerful Washington advocates who helped push the rollback bill through Congress have shifted their focus to battles that pit banks against credit unions and financial titans against smaller firms.

Lobbyists across the banking industry are pushing to repeal the corporate tax exemption enjoyed by credit unions. The credit unions are hitting back, urging Congress to restore a Depression-era law that would limit some of the activities banks could engage in and put a barrier between the investment and traditional banking sides.

Community banks are also fighting with credit unions, this time over a tax exemption for the latter group.

Community banks insist the tax break gives credit unions an unfair competitive edge, while credit unions counter that it’s fair compensation for their smaller market share and the stricter membership rules they must apply.

“When the crisis hit, people were so turned off by what the big banks and Wall Street banks were doing, we grew an enormous amount of market share,” said Berger. He noted that credit unions still only represent roughly 10 percent of the U.S. financial services industry.

Last year, trade groups buoyed by the election of a Republican president and Congress rallied behind a Dodd-Frank rollback. Banks, large and small, as well as credit unions found themselves with an unprecedented chance to loosen Wall Street regulations. With centrist Democrats on board, a compromise bill cleared the Senate in March, the House in May and was signed by Trump soon after.

Now different financial interests are struggling to find common ground.

Tensions between community banks and credit unions boiled over earlier this year, when the Independent Community Bankers of America (ICBA) called on Congress to reconsider the corporate income tax exemption for credit unions, citing the industry’s expansion and decades of bank consolidation.

Senate Finance Committee Chairman Orrin Hatch (R-Utah) echoed those concerns in a letter to the top federal credit union regulator, setting off a public fight between banking and credit union lobbyists waged though op-eds, open letters and Twitter debates.

The fight put most lawmakers in a difficult spot. Republicans and Democrats are broadly supportive of both community banks and credit unions given their small size and heavy presence in almost every congressional district. That makes a repeal of the credit union tax exemption unlikely. Lawmakers are more eager to pursue policies that could benefit both industries.

While advocates for community lenders and credit unions battle over the tax exemption, they’ve united to fight major banks on other issues.

Ten years after the financial crisis, big banks have reemerged as an outspoken and powerful presence in Washington. The revamp of the Financial Services Forum and creation of the Bank Policy Institute this year established two trade groups specifically advocating the interests of the nation’s largest banks.

Those firms, along with the American Bankers Association and Consumer Bankers Association, are flexing their muscles, pushing Trump-appointed regulators to wind back other areas of Dodd-Frank.

The Federal Reserve must now decide whether to roll back some Dodd-Frank rules for banks with between $100 billion and $250 billion in assets, exempting them from stricter capital, liquidity and risk mitigation requirements.

A group of GOP senators urged the Fed in an August letter to ease those rules for banks within the $100 to $250 billion range, insisting that it was the intent of the rollback law Trump signed.

Lobbyists for community banks and credit unions, though, have fiercely protested those efforts, insisting that further relief for financial titans could trigger another devastating crisis.

They are also protesting the Fed’s proposed loosening of two standards meant to ensure megabanks have sufficient resources to weather a crisis: the enhanced supplementary leverage ratio and a surcharge applied to the biggest bank holding companies.

“Washington should hit the brakes on this dangerous trend toward relaxing needed protections for our financial system and economy,” wrote Rebeca Romero Rainey, president of the ICBA, in an op-ed last week.

“As a nation, we cannot afford to repeat the mistakes that contributed to that catastrophe.”

The NAFCU, the credit union lobby, has also raised concerns about the size and influence of major banks. It has called for restoring the firewall between investment and consumer banking.

The group argues that banks are still too big to fail and pose existential threats to the U.S. economy though their size alone.

Republicans are not likely to act on those calls, but a Democratic takeover of the House could give those efforts momentum. Rep. Maxine Waters (D-Calif.), the ranking member on the House Financial Services Committee, has introduced legislation to break up big banks that are routinely penalized for abusing their customers.

If the Senate also flips, Sen. Sherrod Brown (D-Ohio) would take control of its Banking Committee, giving another big bank skeptic a powerful gavel.

Even so, most financial watchers say that drastic measures to reshape the financial sector would likely be grounded by business-friendly Democrats teaming up with Republicans.

But that hasn’t kept the trade groups from taking shots at one another and pushing their views.

The Bank Policy Institute, whose members would be likely targets for being broken up under Waters’s bill, called credit union proposals for tougher rules on banks unnecessary.

“[NAFCU] should be careful about trying to drag down profits at large banks,” the group tweeted. “They pay billions in taxes per year, so you don’t have to.”