Dodd: Sen. Crapo’s bank reform bill has one fatal flaw

A decade ago, the United States financial services sector was brought to its knees with breathtaking speed threatening global collapse. This week, the Senate is considering a set of modifications to the reforms enacted in the wake of the worst financial crisis since 1929. I welcome that review, but I urge my colleagues to use caution. 

It was exactly 10 years ago this St. Patrick’s Day weekend that the investment bank Bear Stearns collapsed. The fifth-largest U.S. investment bank went from healthy to insolvent within 72 hours.

{mosads}Six months later, almost to the day, a small group of congressional leaders gathered in the conference room of House Speaker Nancy Pelosi (D-Calif.) and were told by then-Federal Reserve Chairman Ben Bernanke that unless we acted in a matter of days, the entire financial services sector of the U.S. and part of the international system would melt down. 

Over the next several years, our country experienced a level of economic carnage exceeded only by the wreckage caused in the Great Depression: $13 trillion of national wealth evaporated, 5 million homes foreclosed and 27 million jobs disappeared, people were underemployed or stopped looking for work altogether. Longstanding financial houses collapsed, merged or went into receivership.  

I recount these decade-old events to remind us of how close we came to a total financial collapse with global economic consequences, and I know of no one who believes that, in the wake of these devastating results, we should have left the U.S. financial architecture as it existed in the fall of 2008.

Over the next two years, my colleagues and I on the Senate Banking Committee, and my House colleague Barney Frank (D-Mass.) and his colleagues, collaborated to write the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The bill provided much needed consumer protection for average Americans, greater transparency and accountability in our financial markets and stronger capital and liquidity requirements, among other reforms. 

Today, our financial institutions and markets are not only stronger than they were 10 years ago, they are stronger than ever — from the brink of collapse to once again the unchallenged global leader in financial services.

It was an exhausting, yearlong process, to write the Dodd-Frank law, involving bipartisan cooperation. Today, the economic strength of our financial sector is secure, the business and banking community are experiencing record profits, bank failures and home foreclosures are rare and for the first time in our history, there is a federal agency dedicated to protecting hard-working American consumers from financial abuses. 

The pending Senate bill leaves the core elements of the Dodd-Frank legislation intact: consumer protection, too big to fail provisions, stress tests, transparency in the derivatives market, the Financial Stability Oversight Council (FSOC), whistleblowing protections and many more.  

Further, the Federal Reserve Board under the competent leadership of Jay Powell retains the authority to regulate financial institutions with assets between $100 billion and $250 billion. 

Congressman Frank and I have welcomed the review conducted by Chairman Crapo (R-Idaho) and Sen. Sherrod Brown (D-Ohio) with the participation of Banking Committee members. We welcome their efforts to craft a bipartisan bill responding to legitimate concerns such as those raised by community banks.  

During the drafting of Dodd-Frank, we worked closely with the Independent Community Bankers Association, responding to every concern they raised. However, I realize that over time, either by regulatory creep or interpretations by regulatory authorities, legitimate issues have been raised affecting community banks.

Dodd-Frank did not target community banks. They, like so many other institutions, were victims of the financial crisis, yet to the extent community banks have been adversely affected by Dodd-Frank, we should make corrections.

But while I applaud the work of my former Banking Committee members, I have serious reservations with the proposed new level of asset thresholds. I agree the existing level of $50 billion can and should be raised, but the proposed $250 billion threshold is too high and raises the danger of a cascading economic effect.

Of the 6,500 banks in the U.S., only 10 or 12 would be subject to heightened supervision. That poses too great a risk.

I have other concerns with the proposed legislation, including the changes that have been introduced since the Crapo bill has come to the floor of the Senate.

Some of these changes are chipping away at the ability to conduct comprehensive and effective oversight, but none of these changes are as significant as the new proposed financial asset threshold of $250 billion. Unless this asset threshold is lowered, I cannot support this bill.

Congress certainly has the prerogative to increase the asset threshold as Senator Crapo’s bill does, but commensurate with that increase is the enhanced responsibility of the Congress to hold the regulators accountable for the frequency and quality of their oversight and supervision.

If the recent decisions by the “acting director” of the consumer agency and other financial regulators, is an indication of heightened responsibility — it is lost on me. 

I urge the Congress to set a new, lower level of asset thresholds for systemically important institutions. The risks, as we painfully learned only a few years ago, are just too high.

And of one thing I am absolutely certain: It will be a very long time before another Congress votes for anything resembling the $700 billion provided to a handful of U.S. banks and other weakened institutions to stabilize the financial system in 2008. 

Lastly, Congress needs to move on from its preoccupation with undoing Dodd-Frank, and address new and emerging threats to the financial system, such as weaknesses in cyber security.

Technology is profoundly changing the landscape of financial services, spawning new and exciting products and more conveniences for consumers. Technology and new products offer tremendous opportunities, but also formidable challenges.

It is time for the Congress to look ahead not backward, and focus its attention on the next set of threats to our financial stability.

Chris Dodd served as a Democratic U.S. Senator from Connecticut for a 30-year period from 1981 to 2011 and was the former chairman of the Senate Banking Committee.