The House is expected to finalize the largest package of Wall Street banking reforms since the financial crisis on Tuesday, rolling back regulations on financial firms from community banks to credit reporting agencies.
The legislation — most commonly referred to as the Crapo bill after its author, the Senate banking committee chair Mike Crapo — is the result of more than a year of negotiations among House Republicans, Senate Republicans, and a group of Senate Democrats that support the measure. It is expected to pass, which would then send the legislation to President Donald Trump’s desk for his signature.
Proponents of the deregulation bill say the measure will free up regional banks to provide consumers access to credit and help boost the economy.
Opponents, including many progressive Democrats, argue that the bill undermines crucial protections passed in the Dodd-Frank Act and could help lead to a repeat of the financial crisis.
A deal between the House and Senate sealed the bill’s passage
The House passage looks set to come after disagreement between conservative House members and a more moderate bipartisan group that helped pass the bill in the Senate.
Rep. Jeb Hensarling, the chair of the House Financial Services committee, and other conservative-leaning House GOP members have long sought a more complete rollback of regulations for all types of financial institutions. But since the more modest bill advanced in the Senate with 17 Democratic votes, anything more extensive than the current bill was likely a non-starter.
As a compromise, House Speaker Paul Ryan promised Hensarling votes on additional financial services reform bills — many of which are expected to go nowhere in the divided Senate.
The vote Tuesday is expected to pass easily, with almost unanimous support from the Republican conference.
Perhaps more intriguing will be how many Democrats vote for the package. House Minority Leader Nancy Pelosi and Rep. Maxine Waters urged colleagues on the Democratic side to vote against the bill.
“The American people paid a very high price for the weak oversight and discriminatory lending practices that culminated in the 2008 financial crisis,” Pelosi and Waters wrote. “We must not allow the GOP Congress to drag us back to the same lack of oversight that ignited the Great Recession.”
What’s in the bill
Perhaps most significantly, the Crapo bill would increase the threshold for a bank to qualify as a Systemically Important Financial Institution, or SIFI:
- SIFI banks are subject to increased regulation, including the need to undergo the Federal Reserve’s stress tests that model the banks’ ability to weather financial and economic downturns without causing a threat to the larger economy.
- These regulations can make it harder for a bank to effectively lend and reduce profitability.
- The Crapo bill would immediately increase the SIFI threshold to banks that hold over $100 billion in assets from the current $50 billion level. It would raise that threshold to $250 billion after 18 months.
- This is significant for larger regional banks like SunTrust, BB&T, and Fifth Third Bank. In all, the number of institutions subject to the harsher rules would drop to 12 from 38.
Such a move has long been sought by congressional Republicans, the Trump administration, and some Democrats.
But critics say financial institutions that held less than $250 billion in assets presented a serious risk to the financial system during the previous crisis. Sen. Elizabeth Warren has pointed to Countrywide, which held $210 billion in assets when it ran into trouble and became the face of the subprime mortgage crisis, as an example.
The bill also includes a series of other changes, which would:
- Exempt banks with less than $10 billion in assets from the so-called Volcker rule. The rule, named after the former Fed chair Paul Volcker, prohibits depository institutions from engaging in proprietary trading and investing in certain hedge funds and private-equity firms — cutting down on the type of risky investments a bank can make.
- Include carve-outs for smaller community banks with less than a certain amount in assets, relaxing rules on what types of real-estate loans the banks can make and how much capital they need on hand.
- Force credit-reporting agencies like Equifax and TransUnion to give consumers free credit freezes, but also shield the agencies from certain class-action lawsuits and allow the firms to offer credit checks for mortgage applications.
It’s not a total rollback of Obama’s Dodd-Frank regulations
While Republicans have painted the bill as a dismantling of the Dodd-Frank Act, signed by President Barack Obama in the wake of the financial crisis, many analysts say that the bill is more of a retooling than a complete dismantling.
Isaac Boltansky, a policy analyst at research and trading firm Compass Point, told Politico’s Ben White in March that the bill is neither as big of a deal as supporters make it out to be or as bad as opponents think.
“The proponents of this bill say that it’s going to unleash a new wave of lending and economic growth,” Boltansky said. “The opponents say that its going to produce some sort of Mad Max-like hell-scape of predatory misdeeds. Obviously the reality is far more nuanced.”
Jaret Seiberg, a financial services policy strategist at Cowen Washington Research Group, also noted that passage of the bill does not automatically lift all of the burdens on regional banks. Rather, the regulators will be steady in changing the rules for these institutions.
“Our point is that while the cost and burden of the post-crisis regulatory response will be less for the regional banks, it is not disappearing,” Seiberg wrote.
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