5 questions as reg relief moves closer to becoming law

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WASHINGTON — Regulatory relief moved closer to the industry's reach Wednesday as senators passed a bill unwinding certain provisions of the Dodd-Frank Act.

The bill, which passed the Senate 67-31, is surely not all the industry wanted. But it is still a clear win for banks — particularly smaller ones — that have abhorred Dodd-Frank.

"This bill was a bipartisan compromise, the changes are commonsense, and it will allow financial institutions to better serve their customers and communities, while maintaining safety and soundness and important consumer protections," Banking Committee Chairman Mike Crapo, R-Idaho, a leading sponsor of the bill, said on the floor ahead of the vote.

Yet the Senate deal still faces a somewhat uncertain path in the House, and larger questions on the size of banks' regulatory burden remain. The legislation, which is billed as helping to reduce regulatory burdens on the country’s smallest financial institutions, has provoked sharp debate in recent weeks. It also has divided the Democratic Party, with moderates supporting the bill and progressives slamming it as a Wall Street bailout.

“On the day President Obama signed Wall Street reform into law, a top Wall Street lobbyist said it was ‘halftime,’ ” Sen. Sherrod Brown, D-Ohio, ranking member on the Banking Committee and a vocal critic of the legislation, said in a floor speech ahead of Wednesday’s vote. “And now big banks and their lobbyists are about to score a touchdown at the expense of hardworking families across the country.”

But supporters of the package insist that it will boost economic growth and help struggling community banks that have been saddled with billions of dollars in added compliance costs since the passage of Dodd-Frank.

The bill relaxes a number of standards for small and regional banks, tweaking mandates around the Federal Reserve’s stress tests, the Consumer Financial Protection Bureau’s “qualified mortgage” rule, the Volcker Rule and much more. The main provision allows certain midsize banks to escape tougher Dodd-Frank supervision by raising a key asset threshold from $50 billion to $250 billion.

The chamber approved the legislation with the support of over a dozen moderate Democrats. The bill will move to the House for consideration, where Republicans are seeking to incorporate several additional provisions of their own.

Below are five key questions for the industry as the package winds its way through Congress.

What is the House going to do?

After Senate approval, the fate of the bill now rests in the hands of House Republicans, including Rep. Jeb Hensarling, R-Texas, chairman of the Financial Services Committee. GOP lawmakers are expected to seek to expand the Senate package if they can.

“The most important question is, what does Chairman Hensarling do?” said Isaac Boltansky, director of policy research at Compass Point Research & Trading.

The House passed a much more sweeping piece of legislation, the Financial Choice Act, in June. While that bill failed to garner necessary support from moderate Democrats in the Senate, there are a subset of bipartisan regulatory relief provisions that House Republicans could try to incorporate into the Senate bill. Hensarling has identified roughly 30 bipartisan House bills that he would like to see attached to the Senate deal.

But moderate Senate Democrats have warned the House not to go too far in making changes to the deal they closely negotiated with Crapo and others. It will be critical to watch how negotiations between House members, and between the two chambers, play out between now and the two-week recess scheduled for the end of the month. Those talks will likely inform the final shape of the legislation.

The odds of changes to the bill increase if the House passes a different version, forcing the two chambers to sort out their differences in a conference committee.

“While Hensarling’s ideal scenario involves a conference committee, my sense is the Senate is wholly disinclined to oblige,” said Boltansky. “We'll see either targeted House amendments or simply an acceptance of the Senate bill.”

Does the Senate deal enshrine Dodd-Frank?

While the Senate package is intended to relax some Dodd-Frank regulations, it still leaves the regulatory regime set in place by the law largely intact.

“The Senate bill makes a couple of changes I don’t like, but 95% of ... Dodd-Frank is unchanged,” former Rep. Barney Frank, one of the 2010 law's primary authors and namesakes, said in an interview with Vice this week. “For all of the complaints when we passed the bill in 2010, and for all of Donald Trump’s ranting about it, the fact that this [regulatory relief] bill is passing and making fairly small changes in the overall [law] is evidence of how well it’s worked.”

This is a departure from what Dodd-Frank defenders feared when Republicans took control of Congress and the White House, when Trump promised to “do a big number” on the law.

The Senate bill remains the biggest change to Dodd-Frank since its passage eight years ago, and it’s unclear that Republicans will get another opportunity for major reforms in the near future.

Is the door still open for more substantial regulatory relief?

The calculus for additional changes to Dodd-Frank is largely dependent on the outcome of the upcoming elections this fall.

“Is this a one-off or is this one of a series of future regulatory relief bills? That depends on the November elections,” said Edward Mills, an analyst at Raymond James. “A big part of the push to get it done now is to do it before we’re in election season, so it doesn’t become a political issue, and to do it before Democrats have a chance to flip the majorities in either the House or the Senate.”

The odds of the House flipping to Democratic control are roughly 50-50 right now, while Republicans are currently favored to keep control of the Senate, according to the Crystal Ball, a website run by the University of Virginia’s Larry Sabato.

Still, the banking industry can expect that conversations about Dodd-Frank will continue in earnest, especially if Republicans keep control of Congress. This possibility has progressives worried.

Those on the left are thinking about “what could come next,” Jaret Seiberg, an analyst for Cowen Washington Research Group, told Politico in a podcast. “If you can get a broad bipartisan majority for this bill, [then] it would suggest that we could slowly start chipping away at many rules and regulations, particularly those focused on the largest banks.”

The Crapo bill’s focus on asset thresholds, for example, could offer a path forward on future reforms. The Senate legislation eases compliance in many areas for banks under $10 billion in assets; institutions larger than that, but that still consider themselves community banks, might be tempted to call for a higher cutoff.

But others noted that while proposals to change the law are likely to continue in coming months and years, attracting the interest of moderate Democrats is likely to be much more difficult after this major fight.

“I think this is the only train leaving the station for quite some time, from a legislative perspective,” said Boltansky. “This has been eight years of hearings and conversations and white papers in the making — they’re handling a lot of the big issues here and there’s not a lot left on the to-do list.”

How will policymakers adapt to the new SIFI threshold?

When it comes to one of the bill’s most controversial provisions — a measure to lift the $50 billion threshold for “systemically important” institutions to $250 billion — it is likely that the focus will now shift from Congress to regulators.

If the legislation is signed into law, the Federal Reserve will have greater discretion to tailor oversight of regional and midsize banks. That process will be largely overseen by Randal Quarles, the Fed’s vice chair of supervision.

“It's all about Quarles and what he does,” said Mills. “He has already indicated that there's a lot of regulatory tailoring that needs to happen between $250 billion and the global systemically important banks — the more that’s done there, the less that will be done by Congress or the Financial Stability Oversight Council.”

A number of Republicans wanted to get rid of Dodd-Frank’s numeric threshold altogether and replace it with a method for determining a particular institution’s systemic risk individually. The Senate deal does not go that far, but it does direct the Fed to make such determinations for banks between $100 billion and $250 billion in assets.

Fed Chairman Jerome Powell warned during a recent Senate Banking Committee hearing that the regulator won’t hesitate to designate a bank below $250 billion systemic and will develop a framework to address the legislation if it becomes law.

“We have not been shy about reaching below $250 billion,” said Powell.

Mike Alix, a principal with PwC’s financial services advisory group, said that if the legislation passes, banks will have to see what business lines and products the Fed views as risky — and whether they are worth keeping if they come with a SIFI tag.

“Clients are going to be very interested in how that develops and then deciding for themselves what stuff they have built over the years they want to keep,” he said.

Can Democrats mend their party?

The fight over the legislation in the Senate has become particularly fierce in the last couple of weeks, due in large part to sharp pushback from progressive lawmakers, including Sen. Elizabeth Warren, D-Mass. But despite heightened pressure and media attention, Democratic moderates have so far stayed on board with the reform package, raising questions about what’s ahead for the party.

Now that more centrist Democrats are on their way to securing a likely win for community bankers in their districts, it’s expected that they will hold the line with their party on more divisive issues, like changes to the Consumer Financial Protection Bureau.

“There's a pretty clear history here that Senate Democrats are not going to go along with any changes in the budget or structure of CFPB,” said Brian Gardner, an analyst with Keefe, Bruyette & Woods. “You have a number of red- and purple-state Democrats that felt the need to go out and pass a banking bill that their local bankers want badly. Once that happens, they can pretty much wipe their hands when speaking to constituents and say, look, I did what you wanted and we’re not going to be with you on the CFPB.”

Yet others note that it’s possible the legislation could be the sign of a fundamental shift in how the party approaches financial services policy.

“The history of banking legislation is that it was an area in Congress that usually broke down on regional alliances, not party alliances,” said Mills. “Since the financial crisis, it’s been really the first time in the modern era that financial issues were partisan issues. I'm interested to see if we are starting to see a return of regional alliances as it relates to banks.”

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