Update 274 — S. 2155: Critical Backward Glance
and a Sneak Peek Ahead on the Bill and Progeny
Whatever the merits of S. 2155, the current moment of good feeling surrounding 91 consecutive months of economic growth will not last forever. If the (inevitable) downturn is sharp, the bill and its supporters may come under scrutiny for enacting the deepest and most comprehensive rollback of Dodd-Frank to date.
Opponents of the bill should take pride in holding the line in the Senate — in the five months between its introduction and the vote on final passage, the number of Democratic cosponsors went from 9 to 12. The House Democratic leadership and whips cut support down to 17 percent of the caucus, half the amount in the Senate.
Good long weekends and recesses and Memorial Day all.
Counter-Intuitive, Countercyclical Economics
The regulatory rollback codified by S. 2155 is reckless from an economic standpoint. Since the Dodd-Frank Act (DFA)’s passage, the US economy has mounted an impressive recovery from the depths of the great recession. Still, the economy has not yet completed a full business cycle since DFA became law. The protections put in place after the crisis have yet to be tested in a downturn. While it is rational to re-examine regulatory rules, it could easily turn out to be premature to begin chipping away at DFA’s foundation without sufficient time to review its total impact.
Since regulators and industry did not see warning signs in the lead-up to the great recession, giving them discretion to find the right approach to regulation after the great recession is unwise. Tailoring is dangerous when systemic risks go unseen. Beyond weakening rules for the biggest banks, expect more bad mortgages on bank portfolios with the rollbacks in qualified mortgage (QM) rules, appraisals, escrow and manufactured housing. Additionally, the Volcker Rule change, community bank provisions, and Home Mortgage Disclosure Act (HMDA) exemptions substantially reduce disclosure. All of these factors could work together to produce the recipe for another crash.
Big Banks Win, Small Banks Stiffed
2155’s proponents argued that these rollbacks are desperately needed to help community banks that are struggling with undue compliance costs. While it might be true that community banks are closing their doors, a closer look at the legislation makes it hard to see how S. 2155 addresses these concerns. Community banks will see some benefit to their bottom lines thanks to exemptions from Basel III rules, the Volcker rule, and the HMDA reporting requirements.
The big winners in S. 2155 are the big banks with assets between $50 and $250 billion. These big banks stand to benefit substantially from rollbacks on enhanced supervisory standards including stress tests, living wills, and capital ratios. This is likely to set off a wave of consolidation in the industry. Historically, no factor has impacted M&A activity in the banking sector more than de-regulation, and S. 2155 is one of the most significant deregulatory bills to become law in 20 years. S. 2155 might be good for the community bankers who stand to cash out, but it will only hasten the demise of the institutions they manage.
Weak Polling in Every Region
2155 polls dismally among the voters that Democrats are relying on to take back the House in November. 67 percent of voters oppose loosening bank regulations, and a full 78 percent think that big banks have too much influence on Congress. Possessing great instincts, Minority Leader Nancy Pelosi and House Financial Services Committee Ranking Member Maxine Waters worked hard to whip votes against the bill. With polling numbers so bad, it is little wonder that experienced Democratic leadership took pains to dissuade members from supporting the bill. On the eve of such an important election season, Wall Street campaign funding is not worth the risk of alienating a public that has little sympathy for historically profitable banks.
Lies, Damn Lies
The public has been badly misled about S. 2155’s impact, which proponents have artfully branded the “community bank bill.” How lacking was the public information about it? In a New York Times bold call out, the paper referred this week to the legislation as “a bill to lift strict rules on small and medium banks.” Banks with between $50 billion and $250 billion are not small or medium sized. They include 25 of the 38 largest banks in the country that together hold $3.5 trillion in industry assets.
Will the GOP seem a 2155 2.0? The bill’s champions like to say this is as far as they would ever go in rolling back DFA, but the GOP has already set its sights on the next chance to do even more damage to systemic risk rules. The House appropriations package released just this week includes numerous riders that cut DFA further, including handicapping the SIFI designation process, mandating fewer living wills, providing stress test relief for non-banks, and directing tailoring for similarly-situated banks.
Once again, a big bank de-regulation bill has passed during improved economic times under the guise of helping the little guy. A few years down the road, when big banks need another bailout, it will be the little guy who ends up footing the bill, he believes.. While the President calls DFA a disaster, it is S.2155-style deregulation that often becomes history’s culprit. We not address the effect of headlines reporting campaign contributions in big dollars from the financial firms benefiting from the bill to incumbents who voted for it.