Senate bill isn’t a death sentence for Dodd-Frank; far from it

Tuesday, the Senate voted, 67 to 32, to proceed with consideration of S. 2155, its version of Dodd-Frank reform. In reality, this bill would merely tweak the Dodd-Frank Act (DFA), which was enacted in 2010. 

Importantly, S. 2155 is far more limited in scope than would be the combined effect of several bills passed by the House to reform DFA. The Senate’s more modest approach reflects the higher hurdle — 60 votes — that must be cleared to secure Senate passage of most legislation.

{mosads}While the primary motivation for amending DFA is to reduce the regulatory burden on small community banks and larger regional banks, more controversial provisions in S. 2155 and in the House bills would lighten the regulation of large and very large banks.

The successful vote to proceed is a strong indication that as early as this week, the Senate will pass S. 2155, provided, and this is an extremely important proviso, that floor amendments to the bill do not turn moderate Democrats against it. 

Outright repeal, or even a major overhaul of DFA, has never been a possibility in the Senate.

Senate passage of S. 2155 will set the stage for a Senate-House conference to reconcile the Senate bill with several narrower, but collectively more ambitious, House-passed bills that address numerous aspects of DFA reform.

Whatever banking legislation Congress enacts this year will largely be written in the conference committee. It is far from certain, though, in this election year that the conference committee will reach agreement, or if a conference committee report is agreed to, that the report will be passed by both houses. The president will likely sign whatever Congress passes.

Given how inept the Trump administration has been in pushing other controversial legislation, such as immigration reform, it will be folly to look to the administration to provide much leadership in securing congressional enactment of even modest changes in DFA.

Although the DFA reforms currently on the table are relatively modest, they are controversial, if not considered dangerous, by those who believe that any relaxation of DFA, especially as it applies to larger banks, will set the United States up for another financial crisis.

Among the controversial provisions would be alterations in how the supplementary leverage ratio is calculated and whether municipal securities should be included in the definition of “high quality liquid assets.”

An especially controversial provision would raise the definition of a systemically important financial institution to $250 billion in assets from the present $50 billion. 

Raising that cut-off point, though, would hardly unleash wild and crazy banking practices at banking companies in the $50-$250 billion size range. Importantly, the Federal Reserve would have the authority to impose tougher safety-and-soundness requirements, such as stress tests, on banking companies in that size range if it thought it necessary to do so.

Smaller institutions, those with less than $10 billion of assets, will be the relatively greater beneficiaries of whatever DFA reforms Congress enacts. For example, they would face simpler capital requirements and not be subject to the so-called Volcker Rule, which bans proprietary securities trading by banks.

Most importantly, smaller banks would have an easier time making “qualified mortgages” if they hold those mortgages in portfolio. That would give community banks greater flexibility in tailoring home mortgages to the needs of individual borrowers.

Not surprisingly, the Senate bill does not touch the Consumer Financial Protection Bureau. That would be a step too far given the strong support the CFPB has from numerous Senate Democrats, notably Sen. Elizabeth Warren (D-Mass.).

The likely Senate passage of S. 2155 will be a positive step in bringing much-needed improvements in DFA, but it is far from certain that action will lead to enactment this year of meaningful banking legislation. Hopefully, though, that will occur.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system, the growing federalization of credit risk and cryptocurrencies. Follow him on Twitter: @BertEly