President Donald Trump and other supporters of the major banking bill that cleared the Senate on Wednesday say they want to rescue the nation’s lenders from a crush of regulations.
But far from being crushed, the industry looks more like it’s booming.
Banks have hauled in record profits for the last three years and will be among the biggest winners under the new tax-reform law. Their loans are growing by 4 to 5 percent a year, well within historical norms. And even community banks, which the bill’s backers say they’re most concerned about, are making money.
Despite these signs of flourishing health, the deregulation bill passed the Senate in a 67-31 vote that included 16 Democrats and an independent, Angus King of Maine. The House will now take up the legislation. But critics of the bill say the facts undermine the case for rolling back key parts of the Dodd-Frank Act, the landmark law aimed at preventing a repeat of the 2008 financial crisis.
“I don’t see the real-world problem [the bill] is trying to solve, except the problem of bankers’ not making enough money,” said Marcus Stanley, policy director at Americans for Financial Reform, who is among progressives warning that the bill poses potential risks to the financial system.
Sen. Elizabeth Warren (D-Mass.) says the parts of the legislation that boost consumer protection and community banks could have easily passed on their own, without adding benefits for larger lenders.
So why the bipartisan push to roll back regulations?
Those who have embraced the bill — including at least a dozen Senate Democrats, many from states that voted for Trump — say it’s less about boosting bank profits and more about allowing smaller lenders to get back to their mission and encouraging new banks to open.
They say the legislation would free small banks and credit unions from burdensome regulatory costs and paperwork that take them away from serving their customers, especially those in underbanked rural states.
For small banks, the bill would simplify rules around how they fund their operations, reduce barriers to making mortgage loans to customers with lower credit scores, and eliminate requirements for them to prove they don’t engage in speculative trading.
“For someone in a small town in Montana, it could be meaningful if a bank can do more lending to a couple of key businesses,” said Ian Katz, an analyst at Capital Alpha Partners.
Still, it’s not just community banks that would benefit under S. 2155 (115). Lenders with between $50 billion and $250 billion in assets — two dozen of the country’s largest banks — would no longer face a range of rules that apply to their bigger counterparts like Goldman Sachs and Wells Fargo.
While Trump has said he wants to stimulate loans to boost the economy, lending by banks in the past few years has been normal by historical standards. Between 1987 and 2017, the average annual rate of loan growth from banks was 4.41 percent, with a median rate of 5.27 percent, according to data from the FDIC. Lending by banks increased 4.47 percent in 2017 and 5.27 percent in 2016.
Bank profits are also hefty, hitting records in 2015, 2016 and 2017. Profits did fall in the fourth quarter of 2017, but that was because of one-time costs from a technical change in the tax reform law, which will ultimately benefit banks.
But industry groups argue that the bank bill will still be important to the economy. They contend that the Obama administration overreacted to the crisis by imposing too many regulations, which are now preventing banks from making loans to needy-yet-risky borrowers and businesses.
“Tailoring costly provisions will allow many U.S. banks to free up capital for consumers and small business loans instead of diverting funds to pay for compliance costs that do not contribute to economic growth,” said Richard Hunt, president and CEO of the Consumer Bankers Association, a leading trade group for small, regional and large lenders.
While the economy arguably has more momentum now than at any point since the financial crisis, Katz said Congress can’t time legislation based on economic cycles.
“They’ve been working on this for six years, and if the economy’s good and banks are doing fine … I think the way that Congress sees that is, that’s fine, but they have to enact laws that are for the long term,” he said.
Some data back up some need for more lending. Stephen Matteo Miller, a senior research fellow at the Mercatus Center, argues in a recent blog post that high profits for banks don’t tell the whole story. Banks’ return on equity, he says, has been far from record-breaking and has been steady since recovering from the crisis.
Banks also point to data showing that small-business lending has been weak in recent years, despite the recovering economy. The Fed’s Small Business Credit Survey last year found that roughly 36 percent of small businesses said not all of their borrowing needs were satisfied.
Douglas Holtz-Eakin, president of the American Action Forum, said the recovery has also been uneven geographically. “There’s a suspicious correlation between the very heavy burden on these banks, the lack of access to small business credit and the poor recovery, and I think this is a step in the right direction to try to alleviate that,” he said.
Senators like Warren don’t buy the argument that this legislation is the answer.
“There are things we could do to reduce the load on community banks,” the Massachusetts Democrat said on the Senate floor. “And there are still big dangers to consumers we should take up. But this bill isn’t about the unfinished business of the last financial crisis. This bill is about laying the groundwork for the next one.“
One of the most contentious issues in the bill surrounds so-called “enhanced prudential standards,” or stricter regulations under Dodd-Frank that applied to banks that could pose a risk to the broader financial system. The law imposes those regulations only on banks with at least $50 billion in assets; the bill would raise that to $250 billion.
Those tougher rules are intended to reduce banks’ reliance on debt, increase their cash on hand, improve their ability to measure their own risks and force them to plan how to break up if they were to fail. The proposed legislation would recalibrate which banks those rules apply to and how, under the premise that some lenders face more regulatory costs than their risks require.
Proponents of raising the $50 billion threshold argue that making it cheaper for banks to grow above that size will create more competition for multitrillion-dollar banks like JPMorgan Chase and Bank of America. Combining that with relaxed rules on community banks will probably mean more mergers and acquisitions, as the costs of growing decreases, but also help keep little banks viable, they say.
“Competition is a good thing, but it’s hard to measure it exactly,” former Rep. Barney Frank (D-Mass), one of the two namesakes of Dodd-Frank, told POLITICO. “It might mean more interest on your deposits … [or] keeping down rates on mortgages and loans for businesses, and competition does that.”
Frank has argued that the $50 billion threshold is too low for tougher rules, although he disagrees with the bill’s sponsors on setting it at $250 billion. He’d prefer $125 billion, he said.
“I guarantee you that no great thought went into the $50 billion number,” Frank said. “We were making a whole lot of decisions at the time, and $50 billion seemed like a big number, so we said we’re going to put that in there.”
The other problem with having too low a threshold, Frank said, is “if you’re getting close to $50 billion, you might decide not to grow.” “In general, if banks are doing good things, we don’t want them not to grow,” he added.
But Stanley of Americans for Financial Reform said competition alone shouldn’t be the goal. “If we didn’t require airlines to do anything before opening up a new air route, there might be more airlines, but there might be more plane crashes too,” he said.
Supporters say $250 billion was a straightforward number for the senators to settle on, since the Federal Reserve under former Chair Janet Yellen had already loosened some requirements for institutions below that size.
Senate Banking Chairman Mike Crapo (R-Idaho), the legislation’s lead sponsor, pointed to an executive from one lender, Alabama-based Regions Bank, who said he has more people devoted to regulatory compliance than commercial lending. Regions has more than $120 billion in assets.
The legislation, “in his words, would likely liberate as much as 10 percent additional capacity for lending, which in his bank’s case would be $8 billion to $10 billion,” Crapo said on the Senate floor. “That’s capital and access that is not available for individuals, families, and small businesses in this nation.”
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