Dodd-Frank and the CR (Nov. 13)

Mike & Co. —

Positions are already being staked out in anticipation of a compromise on financial regulatory policy next month as part of a long-term extension of the FY 2016 Continuing Resolution.  How deployments look right now is sketched out below.  

Great weekends, everyone…



The terms of engagement for year-end  changes to Dodd-Frank are being gamed out in various quarters around the Hill, with the CR’s December 11 expiration now less than a month away.  Last year, the spending bill came at a price — and that was before the GOP took the Senate.

For the first time since its passage in 2010, a significant amendment to Dodd-Frank (DFA) was enacted last year when the Section 716 swaps “push-out” provision was repealed.  It was accomplished in an 11th-hour deal to get the must-pass “Cromnibus” over the finish line at year end.  The deal enraged Sen. Warren and 21 of 54 Democrats voted against the bill even though its approval came less than three hours before a midnight deadline that threatened a federal shutdown.

And gone was the requirement that some derivatives trades made by bank holding companies be conducted outside the units that hold deposits and enjoy the benefits of deposit insurance.

Within weeks, Warren torpedoed an administration nomination to a key Treasury post overseeing Dodd-Frank.  Though the nominee’s views were not dissimilar from Warren’s, he had spent the bulk of his years at Lazard, a blue chip Wall Street firm (and, possibly worse, French).  No one has been nominated to the post since.

House Financial Services has reported bills weakening, limiting, underfunding, or repealing various parts of DFA frequently this session, passing ten more similar measures in a marathon mark-up last week.  But none of these has a chance of being picked up in the Senate, let alone of enactment on a standalone basis while Obama is President.

In the Senate, the most comprehensive set of legislative limits to DFA yet to clear a major Committee, written by Senate Banking Chair Richard Shelby, cleared the panel on a 12-10 party-line vote in May. The bill has eight major titles and provisions ranging from increasing the SIFI designation threshold to changing the method of selecting the NY Fed President to requiring exams for community banks every 18 months instead of annually.  Have a look:

A party line 12-10 vote in committee isn’t enough to get such a sweeping bill to the floor and Shelby knows it.  Reformers and industry have both taken a close interest in the congressional struggle to refund the government with eyes on December 11.  The appropriations rider strategy has worked before.  Shelby has now publicly stated that the appropriations process, with the implied threat of a government shutdown, offers the “best shot” of getting it enacted.  Riders under discussion cover a range of issues including the Fiduciary Rule, the legal basis for nonprofit groups to challenge discriminatory housing and mortgage-lending practices, and CFPB governance.

Seeking to put a tag on the price Democrats paid in last year’s CR sweepstakes, Sen. Warren and Rep. Elijah Cummings of Maryland, ranking Democrat on the House Overnight and Government Reform Committee published a letter this week from FDIC estimating that the 15 banks currently registered as swap dealers along with their subsidiaries hold up to $9.7 trillion of the types of derivatives that would have been pushed out under Section 716 (totaling 4.4 percent of all outstanding derivatives contract holdings at federally insured banks, comprised of $6.1 trillion in credit derivatives, $1 trillion in commodity derivatives and $2.6 trillion in equities derivatives, per the FDIC letter).

But in the quieter corners of the Capitol, with GOP majorities in both ends, a group of moderate Democrats is negotiating with Republicans, risking the wrath of Warren and maybe the Democratic base.  The group includes Sens. Donnelly, and Heitkamp, coordinated by Tester, occasionally Warner.  Donnelly said work is happening “every day.”  Sherrod Brown:  “everybody’s talking to everybody.”

Shelby is trying to find the price that the CR can bear, in terms of heft and scope of viable changes to Dodd-Frank.

Sen. Moran:  “That’s been the discussion really from the beginning: How expansive can this be, and beyond community banks what more can be accomplished?  The parameters have been narrowed, but, still, finding that sweet spot is in discussion.”

Treasury Secretary Lew on Tuesday:  “We are open to discussions about things that are truly technical but we are very much opposed to anything that would undermine any of the core architecture of Dodd-Frank.  The line between the two is sometimes hard to define.”

If it is only regulatory relief for community banks, it’s like a win-win, most Democrats would agree.  If it’s a tenfold increase in the SIFI trigger, harder to say  If it’s closer to the scope and scale of Shelby’s bill, a stormy December is in the forecast.

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