Update 255 — Changes in Plans and in Perceptions
Hurry Up, Wait for Increasingly Unpopular S. 2155?
S. 2155 – the Economic Growth, Regulatory Relief, and Consumer Protection Act — the largest revamp, rollback, and update of the Dodd-Frank Act (AFR) to date — returns to the Senate floor after session resumes late tomorrow afternoon. The legislative ride for the bill had been smoother than any other big-ticket item this Congress such as the health care and tax bills and the budget.
But something happened on the way to a Senate floor vote. Despite clearing a 60-vote cloture hurdle on a 67-32 vote last Tuesday, this bill (which almost everyone expected to be on and off the floor last week) sparked disagreements regarding amendments and hours of debate, which combined required the bill to be pushed into a second week on the floor.
In the meantime, press stories haven’t been kind to some bill co-sponsors who reportedly received campaign contributions from some of the bill’s biggest beneficiaries. Polling shows the bill and its big bank and too-big-to-fail provisions are underwater in most states by 30-35 points. CBO said the bill would increase systemic risk.
What’s ahead for S. 2155? See below.
Last Week’s Floor Action
Supporters and critics took to the floor to speak about the bill. Chief proponents were floor manager and Chair of Senate Banking, Sen Crapo, as well as Democratic Sens. Tester, Donnelly, Heitkamp, and Warner, Committee moderates. Leading the opposition were the Committee’s Ranking Member Sen. Brown and Sen. Warren.
Proponents suggested that smaller institutions such as community banks have been constrained in extending credit to firms since the passage of DFA and that relationship banking has fallen by the wayside. S. 2155 would slash compliance costs. A sector burdened by supervisory regulations which preexisted DFA would find relief by a rollback of a law from which they were largely and deliberately exempted by Congress.
Opponents claimed that whatever impact the bill might have on community banks, the biggest beneficiaries are the biggest banks. Understated in the debate was the fact that not only are community banks enjoying record profits, theirs are better than the bigger banks’ returns. Records show the number of bank failures dropped by 40 percent in the five years immediately following DFA’s enactment.
A cloture vote held Tuesday cleared the 60-vote filibuster hurdle, 67-32. Four non-Committee Democrats who were not bill co-sponsors voted aye: Sens. Hassan, Nelson, Shaheen, and Stabenow. The only other Democrat who was not an original co-sponsor but voted in favor of cloture was Sen. Jones, the newest member who serves on Senate Banking. GOP support for the motion was unanimous.
Analysis of the changes Sen. Crapo’s manager’s amendment introduced Thursday makes to Title IV:
New Foreign Bank Provision
Section 401 includes a new subsection, Subsection G, which clarifies rules for foreign bank organizations. The amendment aims to resolve concerns about deregulating intermediate holding companies of foreign banking organizations sized between $100 billion and $250 billion. But the two paragraphs in the subsection are contradictory.
The first paragraph says Section 401 must not “affect the legal effect” of Fed rules for foreign banks with more than $100 billion. Yet the next paragraph says the authority of the Fed to tailor regulations for foreign banks with more than $100 billion must not be limited. This protection of tailoring means the Fed may reduce the application of enhanced prudential standards for these foreign banks.
Liquidity Coverage Ratio
The manager’s amendment takes aim at the Supplementary Leverage Ratio (SLR) to the benefit of custodial banks such as BNY Mellon and State Street by allowing them to deduct deposits at central banks from their balance sheet. It also undermines the Liquidity Coverage Ratio by expanding the definition of High Quality Liquid Assets. This allows banks to be invest their emergency funds in less liquid, more risky, assets. While the substance of this change may not be cataclysmic it certainly highlights the ethos of this bill as a giveaway to Wall Street.
Corker Pre-Conferencing Section 402?
In S. 2155’s original form, Section 402 applied a very narrow quantitative definition of a “custodial bank” that referred to a depository institution where “assets under custody is not less than 30 times the total consolidated assets of the depository institution or depository institution holding company.” This narrow definition ensured that only small number of custodial banks, primarily State Street and BNY Mellon, would be able benefit from certain rollbacks on their SLR requirements.
Thereafter, the bill’s drafters changed this language, making this definition more vague. As it stands now, Section 402 defines custodial bank as a “holding company predominantly engaged in custody, safekeeping, and asset servicing activities, including any insured depository institution subsidiary of such a holding company.” This change prompted large institutions like Citigroup to argue that they too should be able to take advantage of Section 402’s relaxation of SLR rules, and lobbied for language to ensure they could take advantage of the measure.
To the disappointment of Citigroup mostly, last week’s manager’s amendment did nothing to address Section 402. Sen. Corker announced an amendment on the floor on Friday which would restore the original definition of custodial bank in the bill text and ensure the provision would only apply narrowly to State Street and BNY Mellon.
Sen. Corker’s move may represent some modest pre-conferencing. The amendment is a moderating one. There is widespread agreement across the political spectrum that expanding access to the 402 rollback would unacceptably increase systemic risk in the economy. That House Republicans are on board with this change is out of character, and don’t expect moderation to be the norm as S. 2155 heads to the House. Sen. Corker’s amendment is an important, but meager, part of S.2155. Expect debate in the House to be intense, especially as conservatives try to deregulate as much as possible.
The Week Ahead
Efforts to add four amendments to the Crapo package, two from each party, were unavailing, part of the reason floor debate was extended into a second week. Discussions are ongoing regarding the amendment process for the coming week. Sens. McConnell and Crapo have not indicated how many or which of the hundreds of amendments filed, if any, will come to a vote.
The Senate reconvenes tomorrow at 4:30. The cloture vote on the substitute is expected to occur at 5:30 p.m. on Monday, If cloture is invoked, there will be up to 30 hours of post-cloture debate before a vote on passage of the manager’s amendment. 30 hours of post-cloture debate may occur prior to a vote on final passage.
Where from Here?
The House and President
Barring a barrage of more embarrassing headlines for some Senators or other unforeseen event, the bill should clear the Senate by Thursday and conferencing with the House will begin in earnest. Agreement is expected and the President will sign, though his radio silence on the bill may reflect concern about the reaction of his base to the bill.
The five Democratic Senators currently trailing announced or hypothetical GOP opponents in the re-election (some by narrow and perhaps meaningless margins) all support the bill and represent states Trump won by large margins, well over 20 points in many cases. Given the extended debate, chances are greater now that the media portrayal of the bill will have some bearing on its popular reception and reelection prospects for proponents.