Opinion

Senate’s Bipartisan Dodd-Frank Rollback Proposal Is a Raw Deal

On Tuesday, the Senate Banking Committee voted 16-7 to advance a newly introduced Dodd-Frank rollback proposal, S. 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act. Ten members of the Democratic Caucus have signed on to this proposal.

Bipartisan support for community and smaller regional bank regulatory changes – if more modest in scope – could be somewhat understandable if the legislation also included strong new enhancements to consumer protection, and strengthened financial stability safeguards for the largest actors. Unfortunately, this bill does neither of those things.

The bill includes only minor consumer protection provisions and goes far beyond providing targeted regulatory relief for community banks. It deregulates 25 of the largest 38 banks in the United States, accounting for $3.5 trillion in assets (roughly one-sixth of the assets in the entire banking sector), removing them from the post-crisis enhanced oversight regime.

This universe of banks deregulated by the bill received $47 billion in TARP bailout funds and include the U.S. holding companies of massive foreign banks like Credit Suisse and Deutsche Bank, which were some of the largest recipients Federal Reserve emergency loans running into the hundreds of billions of dollars.

The centerpiece of this bill is a change to a sensible provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 165 of Dodd-Frank essentially required regulators to develop enhanced prudential standards for the roughly 40 largest banks, out of the almost 6,000 banks in the U.S., that have at least $50 billion in assets. These enhanced standards include living wills, capital and liquidity requirements, stress testing, counterparty credit limits, and more. Section 401 of the Senate’s Economic Growth, Regulatory Relief and Consumer Protection Act would increase that $50 billion threshold to $250 billion.

In practical terms, the banks deregulated by the section would (i) no longer have to file living wills with regulators to plan for their orderly failure; (ii) no longer be subjected to new post-crisis liquidity requirements that ensure banks are able to meet their obligations during a period of stress; (iii) no longer perform company-run stress testing that enhances the risk management capacity of banks; and (iv) will not be constrained by proposed single counterparty credit limits that aim to limit risks that distress at one bank but will tear down another.

The Federal Reserve Board would have the authority to reapply these standards to banks with between $100 billion and $250 billion in assets, but with Trump-appointed regulators who have promised to deregulate more, not less, does anyone really think they would use this authority aggressively? The section also raises the $50 billion threshold for other Dodd-Frank-related provisions. For example, the Federal Reserve Board, in conjunction with the Financial Stability Oversight Council, would no longer have the authority to break up a bank with between $50 billion and $250 billion in assets that poses a grave threat to financial stability.

Banks with between $50 billion and $250 billion in assets are not small banks. The failure of several of them during a period of significant stress in the financial system would adversely impact the regional economies they serve and could disrupt U.S. financial stability. Accordingly, they should have to face these sensible requirements that help insure the safety and soundness of the banking system.

The key complaint that underlies this increase of the $50 billion threshold is that regulations are not adequately tailored. This critique misses the mark. Dodd-Frank gave regulators the authority to tailor these enhanced regulations to fit the risk profile of different classes of banks, as a $1.5 trillion global institution should be subjected to more stringent requirements than a $75 billion regional bank. Regulators have in turn exercised this authority quite extensively and banks with less than $250 billion are exempted from, or face a lighter version of, at least 8 prudential regulations.

Claims that banks of this size are being crushed by post-crisis regulations is another weak argument for this deregulatory proposal. The banking sector is healthy and profitable. Last quarter, the FDIC reports that banks earned $47.9 billion in net income, up 5.2 percent from last year. Lending has increased steadily since the financial crisis and regional banks of this size have taken part in these trends.

Setting aside the necessity of deregulating regional banks, S.2155 is not careful in determining which banks are deregulated. As currently drafted, it appears that the U.S. holding companies of massive, systemically important foreign banks would also be deregulated by this proposal. Deregulating the U.S. operations of Deutsche Bank, BNP Paribas, Credit Suisse, among others, is unwise.

Moreover, by increasing the asset threshold to $250 billion for enhanced standards, the bill would deregulate Northern Trust, a custody bank with $125 billion in assets, but with $8.5 trillion in assets under custody or administration. You read that correctly: $8.5 trillion in investors’ stocks, bonds, and other financial market assets are administered by this financial firm.

Northern Trust is currently not subject to coverage as a global systemically important bank, but it is treated by regulators as an “advanced approaches” firm, meaning it is basically treated as having more than $250 billion for the purposes of several enhanced regulations. But this bill treats Northern Trust as if it were simply a $125 billion regional bank.

The unjustified push to deregulate one-sixth of the banking sector through this provision would be somewhat understandable if the compromise legislation included some major progressive priorities on consumer protection and financial stability. This legislation includes some modest consumer protection provisions, including the right to free credit freezes. Compared to the large financial stability exposure created by the bill, and the significant harm done to consumers through the Equifax and Wells Fargo scandals, the consumer protection provisions are crumbs.

The Economic Growth, Regulatory Relief and Consumer Protection Act is a raw deal for consumers and for the safety and soundness of the banking sector.


Gregg Gelzinis is a special assistant for economic policy at the Center for American Progress.

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