The three Senate Banking hearings this past month on the relationship between Dodd-Frank (DFA) financial regulation and economic growth offered glimpses into quiet negotiations occurring among Committee members, staff, regulators, industry, and academia.
Today, we look at the position-taking and the opening negotiations between Democrats and Republicans on the Committee during the hearings regarding the future of DFA and offer some Intel about draft DFA legislation under discussion that might win bipartisan support later this Congress.
Reports circulated in the media earlier this month of negotiations between progressives such as Sen. Warren and Committee Republicans discussing an agreement to reinstate a version of Glass-Steagall in exchange for lifting the automatic SIFI designation threshold from $50 to $250 billion.
Jaret Seiberg of Cowen Group Inc. published a report on June 3 indicating that OLA could be eliminated in such an arrangement in exchange for changing CFPB into a commission. We think this to be unlikely. Moreover, Democrats don’t have to give this much away.
For the sake of argument, what would be the optimal compromise from the progressive community’s standpoint that they can get with their filibuster margin of seven (48 members, 41 needed to maintain a filibuster)? It’s not an idle exercise since the negotiations are underway in certain quarters in any event.
What DFA issues are under negotiation currently? What role are they playing and what weight do they carry in the ongoing member and staff discussion to date? We consider the issues as they apply to the mainstream sub-sectors of the financial industry.
Community Banks/Credit Unions
Community banks comprise $2.7 trillion in consolidated assets — over 13 percent of U.S. depository assets. These 5,500 institutions hold less than $10 billion in assets individually but serve the needs of 43 percent of small business loans and provide 90 percent of agricultural loans.
Credit unions are worth $1.3 trillion in assets, over six percent of U.S. depository assets. There are 5,800 credit unions in the United States. 248 community banks and 311 credit unions have consolidated per year on average since the early 1990s.
The Community Bank/Credit Union sector carries away on both sides of the aisle at the Committee. At the top of its legislative wishlist would be exceptions for small banks from:
• certain HMDA requirements
• Basel’s risk-based capital regime
• the Volcker Rule and incentive compensation requirements
There is evidence of bipartisan support for these measures, as well as support from the regulatory sector, made apparent at the three hearings. Among the entire industry’s priorities, supervisory and other relief for community banks credit unions enjoys broad bipartisan support, a rarity.
Individually ranging from $10 billion to $50 billion in assets, mid-size banks hold $1.4 trillion in assets and account for six percent of industry assets. They are required to comply with quantitative Fed-run stress tests, face potential Fed’s objections to capital plans through CCAR, and are subject to annual mandated company-run stress tests.
The compromise described above in the June 3 report missed the biggest opportunity Democrats have to win the war on TBTF, at the cost of agreeing to negotiate on the currently unindexed bright-line thresholds of levels of regulatory requirements.
Further inducements may not be needed so Democrats may not need to compromise, and certainly not to yield on GOP efforts in negotiations to undo DFA provisions regarding:
•. Stress Tests — Republicans in Congress seek to
1) Increase the $10 billion DFA asset threshold for annual, company-run stress tests and risk committee requirements to $50 billion
2) raise the threshold for 18 month stress tests from $1 to 2 billion
Specifically, some seek to improve the transparency of Federal Reserve’s CCAR program. Yet transparency should not be pursued to extremes. Opening up CCAR to public notice and comment may lead to banks influencing scenarios under which they’ll be tested. If banks get detailed information on the exact models the Fed uses they may gear their balance sheets towards passing the test around stress test time. Query how burdensome these self-administered tests are.
• Volcker Rule — Republicans in the Senate are looking at exempting banks without significant trading activity or firms with under $10 billion in consolidated assets from the rule. The devil is in the details — simplification isn’t an excuse for a loophole.
These concessions are close to the policy priorities of progressives. This sector’s appetite for a bright line SIFI threshold is the keystone in the compromise.
Regional banks are firms that hold assets between $50 and 250 billion and are not GSIBs. These banks are classified as systemically important to the health of our economy. There are currently 37 of them and together they hold 5.3 trillion in assets.
For this sector, raising the SIFI threshold may be the paramount legislative objective for this Congress. If the Democrats successful secure adoption of an amendment establishing a bright-line dollar-figure designation threshold automatically subjecting that designee to the appropriate level of regulation. The bright-line trigger provides certainty to firms, regulators, and markets. And it has a built-in off ramp.
CFPB — Off The Table
One postscript. Sacrosanct is the CFPB, all Senate Democrats agree. Some members at the SBC hearings insinuated that the CFPB is out of control and needs to be repealed or pulled back greatly. Sens. Brown and Cortez Masto recounted consumer depredations in states hit hardest by the financial collapse (Nevada and Ohio) and all fellow Democrats on the Committee concur. Accordingly, the CFPB is the “untouchable” asset in the talks.