Update 272: House Votes Tuesday on S. 2155; Big Bank Bill Carries More Than Systemic Risk
News came this week that the Senate has prevailed on the House GOP leadership to let S. 2155, the largest rollback of Dodd-Frank to date, to schedule a vote on the bill, which is now slated for next Tuesday.
It is all over but the voting, with the bill expected to pass the House by a comfortable margin. How comfortable, and for whom? The political implications and risks for Aye votes here in a populist cycle may not be worth the headlines, despite the contributions. See more below.
Good weekends all,
S. 2155 House Vote
Next Tuesday, the House is expected to vote on S.2155, The Economic Growth, Regulatory Relief and Consumer Protection Act. Thanks to significant Democratic support in March, the bill passed the Senate with a final vote total of 67-31.
Posturing for future employment opportunities, soon-to-retire Financial Services Committee Chairman Jeb Hensarling has since stalled the bill, pushing for even more deregulatory measures in line with recently passed House bills. Having made his point, Hensarling relented last week, and House Speaker Paul Ryan signaled that the chamber would take up S. 2155 as written.
In exchange, Senate Majority Leader Mitch McConnell agreed to take up a package of HFSC banking bills that have passed committee with bipartisan support. Initial reports suggest that the legislation might not get floor time, and might instead be attached to must-pass bills later in the year. According to Rep. Luetkemeyer, the package of House bills that will be considered by the Senate will focus on capital markets, securities, insurance, and banking.
Revisiting S. 2155 and Systemic Risk
Section 401: This provision would damage the Dodd-Frank Act’s regulatory architecture for some of the largest banks in the country. It increases the threshold for the automatic application of enhanced prudential standards from $50 billion to $250 billion in consolidated assets. These standards include stress testing, living will submissions, and a modified liquidity coverage ratio.
Proponents of the bill express comfort in the Fed’s ability to tailor the application of these standards based on the size, complexity, and risk profile of these institutions. Critics of the bill do not believe tailoring can be effective given the failure of regulators and industry actors to spot systemically sensitive parts of the sector in the lead up to financial crises.
Section 402: Under this provision, custody banks would no longer have to hold capital against funds deposited at certain central banks to meet the Supplementary Leverage Ratio (SLR). The bill defines a custody bank that would reduce capital requirements for two of the most systemically important custodial banks in the world, State Street and BNY Mellon, and would pressure Congress to expand the exclusion to even larger banks in the future.
The provision was roundly criticized by former regulators. Former Fed Chair Paul Volcker, former Fed Governor Daniel Tarullo, and former FDIC Chair Sheila Bair all raised concerns about section 402 specifically before it passed the Senate.
Fed Ready to Run with Discretion
S.2155’s defenders insist the legislation is not deregulatory, and instead supports regulatory recalibration by giving the Fed discretion to apply enhanced prudential standards to banks between $100 billion and $250 billion. Since it passed the Senate, however, Trump-era Federal Reserve rule proposals offer a glimpse into their deregulatory approach to supervisory standards, including proposals to:
- reduce enhanced supplementary leverage ratio (ESLR) capital rules applied to Globally Systemically Important Banks (G-SIBs) and their subsidiaries.
- alter the Stress Capital Buffer by loosening stress testing assumptions, reducing aggregate capital at the largest 34 banks by $30 billion.
Governor Brainard and FDIC Chair Gruenberg each oppose the ESLR rule proposal, which would result in the GSIB subsidiaries holding $121 billion less in capital at their FDIC-insured subsidiaries. These regulators understand what the nominees Trump has trotted out do not: neither the sector nor regulators are able to get regulations right without a structure in place to ensure systemic stability. S.2155 undermines the structure that has been in place for banks between $50 billion and $250 billion.
Vice Chair Randal Quarles as well as Fed Governor nominees Richard Clarida and Michelle Bowman appear to be of one mind when it comes to passing S.2155. Each has advocated for tailoring supervisory standards on the basis of the “size, complexity, and risk-profile” of financial institutions. While they insist they will be able to make the right choices on supervisory standards, it is hard to imagine that they or their successors will be right in every case.
Just a decade ago, regulators and industry alike fell asleep at the wheel and lead the country to crisis. In response, Congress passed the Dodd-Frank Act to prevent the system from coming apart again. Now, just as the economy is getting back to stable footing, Republicans, Trump-appointed regulators, and even some Democrats are ready to ease standards for some of the largest banks in the country.
Democrats in Support: Not Just Systemic Risk
Americans this cycle have been especially clear about their discontent with the appearance and reality corruption in national politics, Supportive Democrats — incumbents this year — supported S. 2155 and took a gamble..and got scorched with banner front-page headlines and embarrassing stories in some of their largest in-state papers.
With the midterms looming, indications are that Democratic support for the bill is waning relative to support it received in the Senate only two months ago. Minority Leader Pelosi and Ranking Member on HFSC Maxine Waters are actively rallying Democrats in opposition to the bill.While a number of House Democrats appear ready to add their names to the bill, observers predict Democratic support in the House will fall below 70 votes.