US Congress moves to roll back bank rules

(Courtesy of Jacksonville Business Journal)

The US Congress took a step towards the biggest rollback of banking regulation since the financial crisis as lawmakers began debating legislation that critics say is a gift to Wall Street and supporters sell as relief for small banks.

Nearly a decade since the nadir of the mortgage meltdown, Republicans joined forces with a group of moderate Democrats to vote on Tuesday to begin considering a bill that would water down parts of the Dodd-Frank post-crisis reforms.

The vote sets the stage for the most critical debate in Congress over banking regulation since the passage of Dodd-Frank in 2010, an issue Republican leaders have moved to the top of the agenda as attempts at gun safety and immigration reform have stalled.

The bill has created stark divisions among Democrats. Moderates say it will release small banks from burdensome regulations, but liberals led by Senator Elizabeth Warren warn that it will encourage more risk taking, including at the “too big to fail” giants of Wall Street.

“It is nearly 10 years to the day since we first learnt that the big banks were crashing the American economy,” Ms Warren told reporters. “Instead of learning from the lessons of the 2008 crash, Congress is getting ready to pass the biggest financial deregulation bill in decades.”

The bill is likely to become fodder in campaigns for the November midterm elections. Many of the bill’s Democratic supporters face tight races in states President Donald Trump won and share a desire by Republicans to notch up a pro-growth legislative win this year.

Among the bill’s Democratic backers is Tim Kaine, Hillary Clinton’s former vice-presidential candidate.

“This is a modest but critical bill. By streamlining regulations, it will bring relief to the small financial institutions who have been hurt by Dodd-Frank’s one-size-fits-all approach,” he said on the Senate floor.

The Senate began debate on the bill after a 67-32 vote that confirmed it has at least 17 Democratic or independent supporters, more than enough to reach the 60 votes needed to pass the chamber. Its prospects in the House of Representatives are more uncertain.

The bill would help mid-sized institutions by lifting the threshold at which banks face closer Federal Reserve oversight to $250bn in assets from the current $50bn.

Ms Warren said raising the threshold was “extraordinarily dangerous”, noting that Countrywide, among the most aggressive of originators of subprime mortgages in the run-up to the crisis, had about $200bn in assets when it collapsed into the arms of Bank of America.

The legislation would also loosen mortgage underwriting standards for small banks with less than $10bn in assets and exempt the same banks from the requirements of the Volcker rule, which bans lenders from placing market bets with their own money.

Lobbyists for the bulge bracket Wall Street banks — whose assets range from more than $250bn to over $2tn at JPMorgan Chase — say they are getting nothing from the bill. But it contains two provisions likely to benefit them.

One would enable them to reclassify municipal bonds as “high quality liquid assets”, effectively the same as cash and Treasury bonds, making it easier for banks that like to hold them to meet a requirement known as the liquidity coverage ratio.

The other provision is a relaxation of capital rules for banks specializing in custody, or keeping financial assets safe. State Street, BNY Mellon and Northern Trust, the big three custody-focused banks, have long argued that it is unfair to calculate capital ratios on the basis of their gross assets, which include cash held at central banks on behalf of clients such as asset managers.

A softening of the rule — allowing the banks to deduct client cash from the calculation of leverage — could also apply to other big banks with custody businesses, such as Citigroup and JPMorgan.

Such banks “have been up in arms over the inconsistency of applying [relief] only to those three banks and not everybody with a stake in that business”, said Michael Alix, a principal at PwC in New York.

Heidi Heitkamp, a Democratic senator from North Dakota, accused critics of the bill of spreading misinformation, but did not mention her fellow Democrats by name. “When you mischaracterize this bill, those mischaracterizations need to be corrected. I am not going to let this legislative history get papered with misstatements about this bill.”

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