Back in 2010, it took the support of a handful of Republicans—three to be exact—to pass the sweeping slate of post-financial crisis reforms known as the Dodd-Frank Act. This week, it took a coalition of Democrats to help advance a Republican-crafted rollback of the infamous legislation to President Trump.
On Tuesday, the House of Representatives voted 258-159 to pass the “Economic Growth, Regulatory Relief and Consumer Protection Act.”
The House vote follows a March 15 vote in the Senate, which had already approved its version of the bill to loosen Dodd-Frank regulations on banks with up to $250 billion in assets. Those institutions, supporters say, are largely community banks ensnared by legislative redress that was initially targeted for large Wall Street and global banks.
Senate Banking Committee Chairman Mike Crapo (R-Idaho) called that version of the bill, which passed with a bipartisan vote of 67 to 31, “the most significant piece of regulatory reform legislation for community financial institutions in nearly a decade.”
Before the final Senate vote, Crapo remarked that America was about to witness a “rare, bipartisan moment that had been years in the making.”
The bill, despite Crapo’s talk of its unifying nature, did—and continues to—divide Democrats into camps of moderates, who support easing banking rules, and progressives who view the retreat a bad idea and likely a prelude to skimming even more regulations away from large and foreign-owned institutions.
The bill also prevailed in the face of Republican critics who wanted a more comprehensive Dodd-Frank overhaul.
The Financial Services Committee, for example, had initially stated its preference for more absolute Dodd-Frank Act repeals, the sort of which can be found in its still-pending Financial CHOICE Act authored and championed by Committee Chairman Jeb Hensarling (R-Texas).
Congressional leadership eventually struck a deal with Hensarling to include bills from his Committee in the final version of the Senate bill. One of those included provisions, for example, set a goal of limiting the Consumer Financial Protection Bureau’s oversight of U.S. banks.
Highlights of the final legislative package include:
Enhanced prudential standards for certain bank holding companies
This section raises the threshold for applying enhanced prudential standards from $50 billion to $250 billion. Bank holding companies with total consolidated assets between $50 billion and $100 billion will be exempt from enhanced prudential standards immediately, and bank holding companies with total consolidated assets between $100 billion and $250 billion will be exempt 18 months after the date of enactment.
For bank holding companies with total consolidated assets between $100 billion and $250 billion, the Federal Reserve will have the authority to apply enhanced prudential standards after the effective date, be required to conduct a periodic supervisory stress test after the effective date, and have the authority to exempt firms from enhanced prudential standards prior to the effective date.
“For years, armies of bank lobbyists and executives have groaned about how financial rules are hurting them. But there’s a big problem with their story. Banks are making record profits. Congress has done enough favors for big banks.”
Sen. Elizabeth Warren (D-Mass.)
This section also raises the threshold for company-run stress tests from $50 billion to $250 billion and requires the tests be conducted periodically.
Supplementary leverage ratio for custodial banks
This section requires the Federal banking agencies to amend the supplementary leverage ratio final rule to specify that funds of a custodial bank that are deposited with a central bank will not be taken into account when calculating the SLR, subject to limitations.
SEC study on algorithmic trading
This section requires the Securities and Exchange Commission to report to Congress on the risks and benefits of algorithmic trading in the U.S. capital markets.
Annual review of government-business forum on capital formation
This section amends the Small Business Investment Incentive Act of 1980 regarding the annual government-business forum of the SEC to review the current status of problems and programs relating to small-business capital formation.
Specifically, this section requires the SEC to review each of the forum’s findings and recommendations and issue a public statement promptly assessing them and disclosing what action, if any, it intends to take with respect to them.
Supporting America’s innovators
This section increases the limit on the number of individuals who can invest in certain venture capital funds before those funds must register as “investment companies” with the SEC.
Currently, the Investment Company Act limits the number of investors in the fund to 100 for the fund to be exempt from SEC registration. This would amend this cap to allow 250 investors in a “qualified venture capital fund” to be exempt from SEC registration.
Encouraging employee ownership
This section requires the SEC to increase, from $5 million to $10 million, the 12-month sales threshold beyond which an issuer is required to provide investors with additional disclosures related to compensatory benefit plans.
It also requires the SEC to index the sales threshold every five years based on the “Consumer Price Index for All Urban Consumers” published by the Bureau of Labor Statistics and rounded to the nearest $1 million.
Improving access to capital
This section directs the SEC to expand its Regulation A+ rules to include companies that are “fully reporting” companies under the Securities Exchange Act of 1934.
Regulation A+ implemented Title IV of the JOBS Act by exempting from registration certain securities offerings by smaller issuers.
Parity for closed-end companies regarding offering and proxy rules
A closed-end company is a publicly traded investment management company that sells a limited number of shares to investors in an initial public offering.
This section directs the SEC to revise registration rules to allow a closed-end company to use offering and proxy rules currently available to other issuers of securities, thereby reducing filing requirements and restrictions on communications with investors in certain circumstances.
Minimum standards for residential mortgage loans
The bill provides that certain mortgage loans that are originated and retained in portfolio by an insured depository institution or an insured credit union with less than $10 billion in total consolidated assets will be deemed qualified mortgages under the Truth in Lending Act, while maintaining consumer protections.
Home Mortgage Disclosure Act adjustment and study
It provides regulatory relief to small depository institutions that have originated less than 500 closed-end mortgage loans or less than 500 open-end lines of credit in each of the two preceding calendar years by exempting them from certain disclosure requirements under the Home Mortgage Disclosure Act.
An institution does not receive the exemption if it received a rating of “needs to improve” in each of its last two examinations or “substantial non-compliance” in its most recent examination under the Community Reinvestment Act.
Capital simplification for qualifying community banks
This section requires that the Federal banking agencies establish a community bank leverage ratio of tangible equity to average total consolidated assets of not less than eight percent and not more than 10 percent.
Banks with less than $10 billion in total consolidated assets that maintain tangible equity in an amount that exceeds the community bank leverage ratio will be deemed to be in compliance with capital and leverage requirements.
Community bank relief
This section provides that banking entities will be exempt from Section 13 of the Bank Holding Company Act if they have less than $10 billion in total consolidated assets and total trading assets and trading liabilities that are not more than five percent of total consolidated assets.
Option for federal savings associations to operate as covered savings associations
This section permits federal savings associations with less than $20 billion in total consolidated assets to elect to operate with the same powers and duties as national banks without being required to convert their charters.
It raises the consolidated asset threshold from $1 billion to $3 billion for “well-managed and well capitalized banks” to qualify for an 18-month examination cycle.
Reactions to the legislative package are, as expected, mixed.
“This is a welcome development that should, with the Administration’s new regulators nearly all in place, begin a comprehensive review of the too many laws and rules that are a drag on economic commerce,” says Thomas Vartanian, senior counsel at the law firm Dechert.
Vartanian was one of the finalists interviewed to be President Trump’s choice as the first vice chairman for regulation on the Board of Governors of the Federal Reserve.
“The goal should be the quality not the quantity of regulation,” he adds. “We desperately need a realistic and rigorous cost/benefit approach to regulation and a return to the application of judgment and discretion rather than ratios and rules.”
The banking law “only modestly advances the deregulatory agenda, relying, as it did, on bipartisan support to gain filibuster-proof passage in the Senate and acquiescence by the House to the Senate version of the bill,” says Mark Nuccio, investment management partner at law firm Ropes & Gray. “A more significant advance is expected when the financial regulators lift the curtain on a proposal for revising Volcker Rule regulations, being referred to already as ‘Volcker 2.0.’ ”
“The new regulations are expected to ease compliance burdens relating to proprietary trading, while not disturbing the underlying legislative safeguards and curtail overly expansive applications of the law,” he explains.
Congressional passage of bipartisan banking legislation, “will be good for America’s economy, increase lending and provide more opportunities for access to credit for consumers,” the Financial Services Roundtable, a trade association for the banking industry, said in a statement.
John Berlau, senior fellow for the Competitive Enterprise Institute, a group supporting free market business policies, cited the “importance of getting regulatory relief to smaller banks” but urged Congress “to go further in reforming the worst burdens of Dodd-Frank.”
The legislation, however, “leaves intact the bulk of Dodd-Frank, including its most crushing burdens on consumers, investors, and entrepreneurs,” Berlau says. “It doesn’t get rid of Dodd-Frank’s costly and counterproductive mandates that have nothing to do with the financial crisis, such as forcing public companies to document whether they may have made use of ‘conflict minerals’ somewhere in their manufacturing process.”
A more progressive view comes from Lisa Donner, executive director of Americans for Financial Reform.
The legislation “ignores the lessons of the financial crisis that cost so many Americans their jobs and homes” and pays no heed to those who “correctly understand the need for tougher, not weaker, oversight of the financial services industry,” she says “By easing oversight of some of the largest institutions in the U.S., lawmakers have paved the way for greater consolidation among banks and less attention from regulators, just as industry-friendly appointees are watering down the rules.”
Sen. Elizabeth Warren (D-Mass.) took to twitter to register her opposition.?
“Big banks have spent millions of dollars trying to roll back the rules we put in place after we bailed them out ten years ago,” she wrote following the Senate vote. “Today, they got what they paid for. The House just passed the #BankLobbyistAct. We lost this round, but we won't give up the fight.”
In another tweet, she wrote: “For years, armies of bank lobbyists and executives have groaned about how financial rules are hurting them. But there’s a big problem with their story. Banks are making record profits. Congress has done enough favors for big banks.”