Senate push for small bank relief laudable but daunting

Monday, key members of the Senate Banking Committee agreed to a set of legislative objectives to address the increasingly evident flaws in the Dodd-Frank Act, which was enacted in 2010 following the last financial crisis. 

While moderate Democrats on the committee support the agreement, ranking member Sherrod Brown (D-Ohio) issued a news release expressing his opposition. The road forward will be bumpy.

The committee Republican news release listed these key legislative objectives:

• Improve consumer access to mortgage credit.
• Provide regulatory relief to small financial institutions while protecting consumer access to credit.
• Provide specific protections for veterans, consumers and homeowners.
• Tailor regulations for banks to better reflect their business models.

{mosads}These are laudable objectives, but as is the case with any complex, far-reaching legislation, the resolution of often conflicting objectives will have to be negotiated and incorporated in legislative language that reflects the often conflicting wishes of many constituencies without impeding Senate passage of the bill. That will be a huge challenge. 

Key provisions in this agreement include:

• Raising the cut-off point for flagging financial institutions as systemically important from $50 billion to $250 billion, but in stages. Like any arbitrary number, this cut-off point could be subject to adjustment as well as modifications as to whom and when it will apply.
• Simplifying capital rules, especially for smaller community banks for whom Dodd-Frank has been especially burdensome.
• Simplifying the regulations governing mortgage origination, especially as they apply to smaller banks.
• Exempting banks with less than $10 billion of assets from the so-called Volcker Rule, which prevents banks from engaging in securities trading primarily to generate profits for the bank rather than serving its customers. 

Getting to this point may be the easiest step in obtaining passage of a regulatory relief bill the president will sign. 

The next challenge will be getting a bill reported from the Banking Committee for action on the Senate floor. Given Sherrod Brown’s stated opposition and the likely opposition of Sen. Elizabeth Warren (D-Mass.) and other Democrats, poison-pill amendments probably will be offered during the committee mark-up and on the Senate floor. 

In particular, amendments to protect the Consumer Financial Protection Bureau from any dilution of its powers and autonomy almost certainly will be proffered by Democrats and opposed by Republicans.

Even if defeated, those amendments will serve as rallying cries for those opposed to any provisions that will be viewed as watering down Dodd-Frank’s consumer safeguards or neutralizing protections designed to prevent the next financial crisis, however misguided some of those objections might be. 

Assuming a bill encompassing these regulatory relief objectives reaches the Senate floor, almost certainly it will be subject to a filibuster, requiring 60 votes for passage. Assuming all 52 Republicans vote for the bill, eight Democratic votes will be needed for the bill to overcome attempts by other Democrats to block Senate passage. 

If a regulatory relief bill makes it out of the Senate, and that is a big if, then a House-Senate conference will have to resolve the likely significant differences between the Senate bill and the House’s Financial Choice Act and related House legislation. 

Successfully resolving those differences is far from certain, especially given the different perspectives between Republicans and Democrats over consumer protections and the legislative tools needed to prevent the next financial crisis.

Given how late Congress is in this legislative year and all the other issues facing it, a conference committee on the two bills almost certainly will not be convened until well into next year, as the election season heats up. A successful conference is far from certain. 

As in a Peanuts cartoon, will various conflicting interests pull the ball away before it can be kicked for a banking reform field goal?  Only time will tell, but even though regulatory reform is needed, legislative success is far from certain.

Bert Ely is a principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system and the growing federalization of credit risk.