Just A Community Bank Bill? (Mar. 6)

Update 254 — Just A Community Bank Bill?
Voters Weigh a Big Bank Bill and the Risks

Debate started on the Senate floor today on S. 2155, the broadest set of changes to Dodd-Frank ever thus far. Resumption of floor debate and possibly some votes on amendments are expected tomorrow. Right from the start, debate has started on whether this is a bill more for community banks and credit unions or for the biggest financial institutions in the country.

A manager’s amendment will include changes to the bill, such as legislation with bipartisan support in the House, Sen. Mark Warner said today. A vote on the manager’s’ amendment could come as early as Thursday.
Below we try to separate fact from fiction regarding the main beneficiaries of the bill.




S. 2155 is a rare and shining example of bipartisanship breaking through D.C. gridlock to help beleaguered, over-regulated community banks. Whether or not community banks’ profit margins are historically weak today is debatable. And S.2155’s most significant impact would have nothing to do with community banks. Most voters don’t believe S. 2155’s most significant benefits go to community banks.

Historical Profitability of Community Banks

Profit reports from the FDIC paint a different picture. Community banks reported $6 billion in profits in the Fall of 2017, a 9.4 percent increase from the year before. Community bank loan balances were up by 7.7 percent over this same period. Loan activity was widely dispersed throughout the community banking population, with 75 percent of community banks increasing their loan balances last year. These strong growth figures hardly paint a picture of an industry that’s drowning in regulatory burden.

Despite this, the community banking lobby has been actively lobbying Congress for regulatory relief for years. Republicans (and now some Democrats) have picked up this banner in order to argue that Dodd-Frank is crushing community banks.

Community Banks: Least-Burdened Firms Under DFA

Amid complaints of the extra-heavy burden Dodd-Frank represents on community banks, it bears remembering: no one did better in winning carve-outs during the Dodd-Frank negotiations process than the Independent Community Banking Association (ICBA). The Dodd-Frank Act gave community banks many exemptions, including:

  • Flexibility in underwriting when issuing mortgages, allowing community banks to benefit from Qualified Mortgage safe harbor.
  • Complete exemption from enhanced prudential standards including stringent capital rules, the LCR, and stress testing.
  • Less expensive FDIC insurance coverage relative to larger banks.

Through the ICBA, community banks have long insisted compliance costs are too high. This is as true in the post-Dodd-Frank Act era as it was prior to its passage. The Dodd-Frank Act is not the root of the problem.

How to Help Community Banks, Actually
The point here is not to demonize community banks. Local banks are an important part of the small business ecosystem and community banks are four times more likely to operate in rural communities. In short, they are a vital part of the national economy.

If we are serious about helping community banks, we should focus on their actual concerns. According to a GAO report published in February, community banks are mostly concerned about Home Mortgage Disclosure Act (HMDA), Bank Secrecy Act, and TILA-RESPA disclosure regulations.

While S. 2155 does attempt to address some of these concerns (in the case of HMDA requirements, quite controversially), the majority of the bill offers, at best, a bad magic trick for community banks. For instance, banks below $10 billion are exempt from the Volcker Rule which prohibits banking entities from proprietary trading or entering into relationships with equity funds. This is largely an empty gesture — few community banks engage in any of the activities outlawed by the Volcker Rule.

M & A A-Plenty
Even worse, it is possible that any marginal gains for community banks will be offset by Title IV’s dismantling of requirements on medium-sized banks, which, paradoxically, could trigger further consolidation in the financial sector. The resulting spike in merger and acquisitions will reduce in-market competition.

Many Republicans have lamented the original $50 billion SIFI threshold as being arbitrary and, by extension, inappropriate. Even granting the premise does not justify this new legislation, if the number is arbitrary then so is the $250 billion level they are raising it to. However, the change will have clear repercussions as institutions begin swelling their portfolios to raise to the new cap(s). Institutions that have previously floated just below the $50 billion threshold will start to consume community banks (merger and acquisition party time!) without any disincentive.

A Costly and Unpopular Bill
This bill is quite unpopular as voters begin to see through the facade and know what S. 2155 legislates. In a poll conducted by Americans for Financial Reform, 67 percent of people oppose the loosening of banking regulations in S. 2155.

Voters have realized that this bill deregulates much bigger banks than the “mom and pop” institutions proponents of the bill like to emphasize. It is evident to 67 percent of voters polled that this bill is not only going to deregulate the same institutions that sent America into a financial crisis, it could also increase the deficit and hurt Americans for years to come.

CBO estimates that enacting the bill would increase federal deficits by $671 million over the 2018-27 period. That deficit increase comes from an increase in direct spending of $233 million and a decrease in revenues of $439 million. Some of that cost and reduction in revenues would be recovered through collections from financial institutions in years after 2027.

CBO also estimates that, assuming appropriation of the necessary amounts, implementing the bill would cost $77 million over the 2018-27 period. Like the tax bill, this act will kick the bill to the grandkids of today’s new voters.

What Happened With Cloture? And Next Steps

This morning the Senate cloture motion to proceed with debate on S.2155 passed 67-32. The 13 Democratic/Independent cosponsors were joined by four other Democrats:

  • Senator Debbie Stabenow (MI)
  • Senator Jeanne Shaheen (NH)
  • Senator Maggie Hassan (NH)
  • Senator Bill Nelson (FL)

All in all, 17 Democrats voted in support of the cloture motion. We turn now to Senate Majority Leader Mitch McConnell for a signal on if he will allow an open amendment process to take place. Few expect an open process as it may force some difficult votes onto moderate Democrats. While this is happening, lobbyists are outspending progressives hundreds of dollars to one every day in defense of this bill.

Minority Leader Schumer and the Democratic caucus may be better off with a full tree and a closed amendment process. The next big ticket item to look out for would be the manager’s amendment sponsored by the architect of this bill, Sen. Crapo (R-ID).

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