Banks poised to win Dodd-Frank changes

Banks poised to win Dodd-Frank changes
© Greg Nash

Banks are close to winning long-sought relief from strict regulations imposed after the 2008 financial crisis. 

Congress is near the passage of a bipartisan deal to exempt dozens of banks from parts of the Dodd-Frank Act of 2010. 

Federal agencies controlled by President TrumpDonald John TrumpFive takeaways from the Democratic debate As Buttigieg rises, Biden is still the target Leading Democrats largely pull punches at debate MORE's appointees are sprinting toward significant rollbacks of key Dodd-Frank rules meant to insulate banks from a disabling financial crisis.

And the acting director of the Consumer Financial Protection Bureau (CFPB) is dismantling the aggressive regulatory and enforcement practices that enraged Republicans and banks while pleasing Democrats and financial sector skeptics.

Advocates for banks and credit unions are beaming as Washington starts to pick apart Dodd-Frank, following years of pressure and wishful thinking.

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“This is the beginning of a complete change in attitude among the policymakers of Washington," said Wayne Abernathy, an executive vice president for the American Bankers Association (ABA), the top lobbying group for U.S. banks.

“These are just the hors d'oeuvres. This is setting the stage for a lot more important things to come.”

Republicans have struggled in vain for almost a decade to loosen much of Dodd-Frank. The law was opposed from its inception by the financial sector for significantly expanding the federal power to supervise and penalize banks and lenders.

Democrats successfully defended the law, a pillar of former President Obama’s economic legacy, during his tenure. Republicans railed against the new rules but were powerless to repeal the regulations in the face of Obama’s veto.

Trump’s stunning 2016 victory, which came after he pledged to “dismantle” Dodd-Frank, changed that. Republican control of the White House and Congress made the law vulnerable for the first time since its passage.

Dodd-Frank's critics spent much of 2017 laying the groundwork for its undoing. Trump filled his Cabinet with financial sector veterans devoted to reining in the law, while the House and Senate worked on bills to reshape it.

The House in June passed the Financial CHOICE Act, a drastic weakening and elimination of major Dodd-Frank powers. The bill passed the House along party lines, but was dismissed as too conservative to clear a Senate filibuster from Democrats.

In the 10 months since then, advocates for loosening Dodd-Frank have taken control of the Federal Reserve, Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission and CFPB. Trump’s nominee to lead the Federal Deposit Insurance Corporation is likely to be confirmed within weeks, which would put all federal bank regulators in Republican hands. 

The Senate also passed in March a bipartisan bill to release dozens of banks from stricter Federal Reserve oversight under Dodd-Frank and scores more from the law’s lending restrictions.

That bill has been at the center of a power struggle between Senate Democrats who co-sponsored the measure and House Republicans who say it needs to include more of their proposals before it earns their support.

House Financial Services Committee Chairman Jeb HensarlingThomas (Jeb) Jeb HensarlingHouse passes Ex-Im Bank reboot bill opposed by White House, McConnell Has Congress lost the ability or the will to pass a unanimous bipartisan small business bill? Maxine Waters is the Wall Street sheriff the people deserve MORE (R-Texas) opened a new path Thursday for the Senate bill through the lower chamber and onto Trump’s desk. Hensarling, the architect of the CHOICE Act, said he’d back down from his demand to amend the Senate bill if its sponsors agreed to consider a separate package of capital formation bills from his committee.

“I’m far more wedded to substance than form, so as I’ve told other people, I’m more than happy to attend multiple signing ceremonies,” Hensarling said at an event hosted by the U.S. Chamber of Commerce. 

Bank and credit union lobbying groups have put immense pressure on House Republicans to clear the Senate bill. They consider the measure essential regulatory relief for community banks and credit unions drowning in red tape from Dodd-Frank.

The ABA focused on pushing the bill through the House during its Washington, D.C., summit last week. The group’s leaders rallied more than 1,000 bankers to visit Capitol Hill in support of the measure before it could be swallowed by political dysfunction.

“I can’t tell you exactly where the next step is, but it will be soon, and very soon, that this legislation will be moving forward,” said James Ballentine, ABA executive vice president of government relations. 

“We don’t know when other issues are going to happen,” he added. “That’s why we’re pushing this so hard at this time.”

House Republicans are eager to strike a deal they can campaign on ahead of the November midterms. Hensarling’s small concession brought the chambers closer to an agreement, but the chairman will still need to cement a deal with Senate Democrats wary of spending more time on an issue that divides their party. 

“I don't think you get that without pressing, pushing, negotiating, cajoling, talking to each individual Democrat like Jeb's doing,” said a Republican on the Financial Services committee, who requested anonymity to discuss private negotiations.

"It's a bunch of people being babies,” the Republican added. “I don't feel sorry for senators that don't want to vote twice."

While lawmakers work out a deal over broader Dodd-Frank rollbacks, Trump-appointed federal regulators are crafting proposals to loosen many of the law’s most controversial rules.

The Fed unveiled plans this month to tailor capital buffers for banks to their risk profiles and recalculate the minimum ratio of a bank’s leverage to core capital. Both actions are meant to make rules intended to strengthen banks clearer and less costly for smaller firms.

Loosening capital buffers and the so-called enhanced supplementary leverage ratio could let some of the biggest banks redirect billions of previously untouched dollars into new loans and investments. 

But the complicated ways different bank safeguards interact has raised concerns among analysts about the risks posed by tailoring these measures — and questions about how they’ll impact different banks.

“The Fed is shooting in the dark and they are going to hit some innocent bystanders,” said Karen Petrou, managing partner of Federal Financial Analytics. “It’s impossible to figure out.” 

The Fed is also working with the OCC on ways to loosen the “Volcker rule,” which banned banks from entering into risky investments with their own capital. Banks say the rule is unclear and unnecessary for smaller firms. 

The OCC is also mulling several ways to ease other rules outside of Dodd-Frank. Comptroller Joseph Otting, a former bank president, is targeting strict anti-money laundering reporting requirements and compliance with the Community Reinvestment Act, a 1970s law pushing banks to invest in economically troubled neighborhoods. 

Those efforts could take years to complete, but have started early enough in Trump’s term to be finalized before the next presidential election.

“Timing is everything in life, and this is just wonderful,” said ABA president and CEO Rob Nichols at the group’s Washington summit Tuesday. “We’re on the cusp of passing really meaningful regulatory reform legislation.”