Washington, D.C., March 6, 2018 – Debate started on the Senate floor today on S. 2155. Is it a rare and shining example of bipartisanship breaking through D.C. gridlock to help community banks? The problem with that view is:
- The claim that community banks' profit margins are weak today is debatable.
- S. 2155’s most significant impact has nothing to do with community banks. [And so the bill in that sense is a Trojan Horse.]
Community Banks – Profitable and Least Regulated
Community banks reported $6 billion in profits in Fall 2017, a 9.4 percent increase from the year before. Community bank loan balances were up by 7.7 percent over this same period. Loan activity was widely dispersed throughout the community banking population, with 75 percent of community banks increasing their loan balances last year. These strong growth figures hardly paint a picture of an industry that’s drowning in regulatory burden.
Despite this, the community banking lobby has been actively lobbying Congress for regulatory relief for years. Republicans (and now some Democrats) have picked up this banner to argue that Dodd-Frank is crushing community banks.
No one did better in winning exceptions to regulation during the Dodd-Frank negotiating process than the Independent Community Banking Association (ICBA). The Dodd-Frank Act gave community banks regulatory exemptions such as:
- Flexibility in underwriting when issuing mortgages, allowing community banks to benefit from Qualified Mortgage safe harbor.
- Complete exemption from enhanced prudential standards including stringent capital rules, the LCR, and stress testing.
- Less expensive FDIC insurance coverage compared with larger banks.
How to Help Community Banks
Local banks are an important part of the small business ecosystem and community banks are four times more likely to operate in rural communities. They are a vital part of the national economy.
According to a GAO report published in February, community banks are mostly concerned about Home Mortgage Disclosure Act (HMDA), Bank Secrecy Act, and TILA-RESPA disclosure regulations.
While S. 2155 does attempt to address some of these concerns (in the case of HMDA requirements, quite controversially), the majority of the bill offers, at best, a bad magic trick for community banks. For instance, banks below $10 billion are exempt from the Volcker Rule which prohibits banking entities from proprietary trading or entering into relationships with equity funds. This is largely an empty gesture – few community banks engage in any of the activities outlawed by the Volcker Rule.
Mergers Incentivized, Costs Increased
Any marginal gains for community banks will be offset by Title IV’s dismantling of requirements on medium-sized banks, which, paradoxically, could trigger further consolidation in the financial sector. The resulting spike in merger sand acquisitions will reduce in-market competition.
Many Republicans have lamented the original $50 billion SIFI threshold as being arbitrary and, by extension, inappropriate. Even granting the premise does not justify this new legislation. If the number is arbitrary then so is the $250 billion level they are raising it to. However, the change will have clear repercussions as institutions begin swelling their portfolios to raise to the new cap(s). Institutions that have previously floated just below the $50 billion threshold will start to consume community banks without any disincentive.
In a poll conducted by Americans for Financial Reform, 67 percent of people oppose the loosening of banking regulations in S. 2155. Voters have realized that this bill deregulates much bigger banks than the “mom and pop” institutions proponents of the bill like to emphasize. It is evident to 67 percent of voters polled that this bill is not only going to deregulate the same institutions that sent America into a financial crisis, it could also increase the deficit and hurt Americans for years to come.
CBO estimates that enacting the bill would increase federal deficits by $671 million over the 2018-27 period. That deficit increase comes from an increase in direct spending of $233 million and a decrease in revenues of $439 million. Some of that cost and reduction in revenues would be recovered through collections from financial institutions in years after 2027.
CBO also estimates that, assuming appropriation of the necessary amounts, implementing the bill would cost $77 million over the 2018-27 period. Like the tax bill, this act will kick the bill to the grandkids of today’s new voters.
Next Steps
This morning the Senate cloture motion to proceed with debate on S.2155 passed 67-32. The 13 Democratic/Independent cosponsors were joined by four other Democrats:
Senator Debbie Stabenow (MI)
Senator Jeanne Shaheen (NH)
Senator Maggie Hassan (NH)
Senator Bill Nelson (FL)
All in all, 17 Democrats voted in support of the cloture motion. Senate Majority Leader Mitch McConnell will now have to decide whether he will allow an open amendment process to take place. Few expect an open process as it may force some difficult votes onto moderate Democrats. While this is happening, lobbyists are outspending progressives hundreds of dollars to one every day in defense of this bill.
Minority Leader Schumer and the Democratic caucus may be better off with a full tree and a closed amendment process. The next big ticket item to look out for would be the manager’s amendment sponsored by the architect of this bill, Sen. Crapo (R-ID).
Continuing to Watch the Process
See previous post: https://cityeconomist.blogspot.com/2018/03/financial-regulation-s-2155-systemic.html Also "Wall Street on Parade": http://bit.ly/2DeKeJq
Throughout the week, the 20/20 team collects relevant news clips, here: https://goo.gl/forms/7NoJ2CmPTzuSzzVZ2
An archive of past updates is here: https://dc-policyupdate.com/
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