Update 256 – S. 2155 Passes Senate, 67-31
Now, on to the House and Conference. Or Not.
On Wednesday night, the Senate passed S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, 67-31. The bill is the most comprehensive rollback of the Dodd-Frank Act to clear a chamber of Congress.
A summary of the bill’s top line provisions and a look at the twists and turns ahead as the bill heads to the House and possibly to conference (16th seed odds) are below. And a word about unintended consequences.
Happy weekends all,
Review of Topline Provisions
The bill provides community bank relief and increases the threshold for the automatic application of enhanced prudential standards from $50 billion to $250 billion. This de-regulates 25 of the 34 largest banks in the country, altogether worth $3.5 trillion – one-sixth of the banking sector. Together, these banks collected $47 billion in TARP bailout funds.
The bill also instructs the Fed to tailor regulations for banks over $250 billion, allows for the deregulation of several foreign banks, and allows certain banks to omit deposits at the Federal Reserve from being subject to the Supplementary Leverage Ratio (SLR).
Enjoying the support of over 60 Senators, bill cosponsors did not allow for significant debate on the many substantive amendments that were offered by opposing Senators. 16 Democrats and one Independent Democrat voted in favor of the bill. The only permitted changes were amendments that failed to address the unintended consequences of deregulation for safety and soundness as well as a passel of bills adopted wholesale from the House. These included an amendment protecting the Fed’s ability to tailor down standards for foreign banks and another that undermined the Liquidity Coverage Ratio by allowing certain banks to invest in less liquid, riskier, assets.
Hensarling Playing Hard to Get
S. 2155 now goes to the House either to be passed as is, or altered and pushed to a Conference Committee. House Financial Services Committee Chair Jeb Hensarling commented yesterday that the House will not be a “rubber stamp” for the Senate measure, so it appears that an extended negotiation between Senate and Republicans in the House may be on the horizon.
After passing dozens of deregulatory bills through his Committee already this Congress and having announced his plan to retire after this term, Rep. Hensarling may be legacy-seeking, hoping to put his name on a marquis piece of legislation or looking to secure a post-Congress job. Regardless, he is likely to make use of his soap box and perhaps raise money for colleagues from industry in anticipation of the midterms.
Speaker Ryan has reportedly promised not to advance the bill without Hensarling’s approval but odds are against Hensarling or Ryan turning this into a prolonged and substantive fight. The House GOP is under intense pressure from the community banks to pass the bill, and Senate leadership and the White House are unlikely to have much patience.
Wait, Conference Occurred Already?
S. 2155 has already undergone a significant amount of quiet pre-conferencing. 40 provisions from a number of House bills were added to the Senate bill through last week’s manager’s amendment, an attempt to head off the need for a formal conference with ideological House Republicans. That could mean the only remaining House bills that Hensarling could demand to include during a conference — gutting the CFPB or further increasing the SIFI threshold — have already been deemed too toxic for Democratic cosponsors to stomach.
If Hensarling insists on taking a hard line in conference, the bill will lose its limited Democratic support and die on its return to the Senate. As cosponsoring Sen. Tester put it, “If [Hensarling] adds a bunch of crazy shit, it’s going to die.”
What to Watch For Now
While the possibility of a conference committee on S. 2155 is fairly remote, Republicans are in no rush to get the bill to President Trump’s desk. Letting Hensarling sound off on behalf of large banks will only help to raise more money in anticipation of the midterms and what is shaping up to be a real fight for a House majority.
Republicans will mostly likely hold onto the bill until right before an upcoming recess week (when members return to their districts to meet with community bankers) and then quietly strong arm Hensarling into accepting the bill as written. Most observers expect the process to play out over the next two months.
For now, progressives will rest their hope on two outside shots. One is that the bill gets worse in Conference and dies as Senate Democrats withdraw support. The other is that years of House frustration with playing second fiddle to the Senate boils over and the House GOP refuses to take the bill up. Given the amount of pre-conferencing the bill went though, these possibilities are remote.
Unintended Consequences of Deregulation
Much is said about the presumably negative unintended effects of regulation. Much less is said about unintended consequences of deregulation. Congress can perhaps be excused for not understanding precisely how financial sector business cycles operate but they should know by now they are inevitable.
Banks have hauled down record profits three years running. Loan rates are at historic norms, including at community banks, which have profited as much as the regional and megabanks. We are seeing low loan losses, rising bank income, and increased risk appetites, supported often by retrospective risk models and rising collateral values. Deregulation accelerates this process and sends more institutions over the risk cliff in search of bigger margins. Does this sound familiar?
As former CEO of Morgan Stanley said just before the crisis of 2008, “We cannot control ourselves.”
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