As Congress pivots from the GOP’s tax measure that overwhelming benefits wealthy shareholders over workers, the Senate is expected to vote on an under-the-radar rewrite of banking rules that prioritizes the deregulatory wishlist of banks ahead of consumers and the health of our banking system.
The measure, the "Economic Growth, Regulatory Relief, and Consumer Protection Act," would gut important Obama-era banking regulations known as Dodd-Frank and is the banking lobby’s dream.
If it passes, it will be the greatest undoing of financial regulations designed to protect banking consumers and the economy at large since the financial crisis.
While proponents of the measure argue it provides much-needed regulatory relief for the small and mid-sized banks that serve rural America, the bill has a number of questionable provisions.
For example, it deregulates foreign megabanks, like Santander and Credit Suisse, and lets certain domestic firms, like American Express and Fifth-Third, off the hook from important regulations that ensure any failure doesn’t bring down the banking system and threaten our economy.
Conservatives in Congress have loudly and consistently denounced the common-sense reforms of Dodd-Frank since it passed, and this latest attempt at repealing those protections is expected to move through Congress with relative ease.
This latest rollback attempt, however, comes with 12 Democratic cosponsors. If we want to ensure our financial system has the necessary safeguards to avoid a repeat of the 2008 Wall Street crisis and facilitate shared growth in the real economy, this is the wrong direction for these lawmakers.
Policymakers in both parties should think twice before supporting a bill that’s in lockstep with the banking lobby’s wishlist and puts our economy, consumers and American taxpayer at risk.
This measure has been sold as providing technical fixes to Dodd-Frank and relief for small and rural community banks, but it’s not as innocuous as its supporters like to argue. If this passes, it will undo oversight of some of the largest regional banks, assets managers and hedge funds, including Fifth-Third, State Street, Sun Trusts and American Express.
By weakening oversight by the Federal Reserve, banks with up to $250 billion in assets have a lot to gain from this provision. Dodd-Frank mandated enhanced oversight for all financial institutions with over $50 billion in assets.
This threshold triggers a set of rules, like additional capital buffers and stress tests, to ensure banks can weather an economic storm and ensure they serve their proper function as intermediaries between lenders and borrowers, which drives economic growth in the real economy.
The Senate bill would raise the threshold five times, from $50 to $250 billion, effectively deregulating 25 of the 38 biggest banks in the U.S., which account for nearly one-sixth of assets in the banking sector.
We’ve seen this before. Countrywide Financial, the $200-billion mortgage lender, was one of the key players in the financial crisis, and its failure was a stark reminder to regulators and Congress that mid-sized, regional financial institutions can put the financial system and economy at risk.
We should learn from this history — not ignore it by raising the threshold five-fold. Not only can banks this size put the entire economy in harm's way, but raising the threshold would likely lead to a wave of mergers, deepening the consolidation of banks hovering near the $50 billion range.
The total number of banks in the U.S. has been dropping for decades, largely because of deregulation of interstate banking. Since the regulatory costs to consolidate would decrease under this bill, its passage will likely contribute to this trend — not curb it.
Supporters are quick to argue that the proposal gives the Federal Reserve discretion to apply enhanced oversight for banks with assets between $100 and 250 billion. The Federal Reserve, however, is a notoriously risk-averse regulator. Without an explicit mandate, the Fed is unlikely to take to charge to rein-in these banks.
In effect, this provision guts the Fed's existing authority. Dodd-Frank gave regulators, including the Fed, specific regulatory goal posts and requires the Fed to take action for a reason. Absent such a requirement, the Fed is unlikely to act.
This is part of a broader pattern of undermining banking reforms that no elected official should not support. As the Trump administration, with the support of congressional allies, works to eliminate consumer protections, undermine the Consumer Financial Protection Bureau and curb rulemaking and enforcement actions, this is not the moment to add more wind to the deregulatory sails.
Once this bill moves to the House, amendments will likely be added to further undermine financial reform. Without progressive push back, the substance of this bill could go from bad to worse.
As the economy finally begins to show signs of recovery, now is not the time to support ineffective economic policies culled from the banking lobby’s wishlist.
The proposal will leave our economy vulnerable and undermine the important strides regulators and policymakers made to build a productive — not extractive and predatory — engine of economic growth.
The people’s elected representatives should refuse to cooperate with this Wall Street giveaway and encourage their colleagues to put Americans before banks.
Katy Milani is the program director for the Roosevelt Institute, a liberal think tank.