Cheat Sheet: What Bankers Need to Know About the Yearend Budget Battle

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WASHINGTON — A familiar fight is brewing on Capitol Hill over a yearend budget deal, as questions loom around whether banking policy will be included in the final package.

Lawmakers are debating a host of potential changes to the Dodd-Frank Act, including raising a $50 billion threshold for enhanced regulations that could provide significant regulatory relief for regional banks. The move follows the political clash last year over the controversial rollback of a key swaps rule that still weighs heavy on the minds of many Democrats.

Below we answer some frequently asked questions about the negotiations and the potential impact for banks:

What's the fight over?

Broadly speaking, lawmakers are working to pass an appropriations package by Dec. 11 to avoid a government shutdown. President Obama signed a two-year budget deal last month that lays out top-line budget figures, but Congress must still pass spending plans for the various government agencies.

Despite resistance from the White House and Senate Democratic leadership, Republican lawmakers are expected to include a host of policy riders in the upcoming deal, and the banking industry is waiting to see what that will mean for financial services policy.

Sen. Richard Shelby, R-Ala., chairman of the Banking Committee, set the stage for this showdown by inserting his sweeping regulatory reform bill into the financial services appropriations legislation over the summer. He also included controversial changes to the Consumer Financial Protection Bureau that would subject the agency to congressional appropriations and change its structure to a five-member board.

A host of unrelated policy measures are also up for debate. Republicans may try to halt a Department of Labor rule on fiduciary standards for retirement accounts from being finalized or may try to defund Planned Parenthood or override Obama's decision rejecting the Keystone XL pipeline earlier this month.

Observers are looking to the first week in December — when lawmakers return from the Thanksgiving holiday — as the key time frame for a deal to be reached. That would leave Congress enough time to pass the plan before the looming deadline.

What's on the table?

There are several key provisions in the Shelby bill worth watching. The chairman has proposed raising the $50 billion threshold to $500 billion (while giving regulators the power to impose tougher rules on select smaller banks) as well as making changes to Financial Stability Oversight Council and its powers for designating nonbanks as "systemically important" financial institutions.

A handful of moderate Democrats and Republicans on the Banking Committee have been privately meeting for months to discuss a possible compromise on raising the SIFI threshold, though it's yet unclear what a deal might look like. Discussions are reportedly centered on raising the threshold to the $200-$250 billion range, a potential boon for the $125 billion-asset Regions Financial, based in Shelby's home state of Alabama, along with a number of other regional banks.

"The conversation is moving in the right direction because the undivided position in Congress, on both sides of the aisle, is the $50 billion threshold is arbitrary," said Richard Hunt, president and chief executive of the Consumer Bankers Association. "I would expect to see an increase in the threshold generate attention as a select few ideas are debated for inclusion in the final omnibus bill."

Still, it's an open question whether moderate Democrats will sign off on such a plan — or whether they can win over Senate leadership and the White House, which have raised objections to sweeping policy measures in the budget deal.

At the same time, House lawmakers are debating their own changes to the $50 billion line. The Financial Services Committee approved a measure last week that would remove the threshold altogether in favor of using qualitative factors, like interconnectedness, for determining systemic importance. Several Democrats signed on to the bill, by Rep. Blaine Luetkemeyer, R-Mo., while a rival measure by Rep. Carolyn Maloney, D-N.Y., that would keep the threshold but require the Federal Reserve to better tier regulations based on qualitative measures of systemic risk, also won considerable support.

"We're coming down to crunch time for lawmakers, which facilitates a brief burst of bipartisanship and opens the door to some legislative compromise, including discussion of regulatory relief," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. "But I'm skeptical about the SIFI threshold, because there's no agreement whatsoever between the two parties — let alone the two chambers — regarding how to change the threshold."

A litany of less controversial, bipartisan bills are also up for debate, including measures to modify annual privacy notice requirements and extend the exam cycle for healthy community banks. Shelby's bill includes some overlap with a plan put out earlier this year backed by congressional Democrats, which could provide a road map for agreement.

"I remain optimistic about certain elements cross the finishing line — especially provisions for community banks," Boltansky said. "By and large, the overarching question is, will Congress legislate or will the magnetism of partisanship pull each party to its separate pole?"

What are opponents saying?

There's already been considerable pushback from the left against the use of policy riders to move controversial measures through Congress.

Sen. Sherrod Brown, D-Ohio, the ranking member on the banking panel and a lead author of the Democratic alternative bill, said in a statement Monday that the party won't accept sweeping changes to banking policy beyond relief for community banks.

"There's bipartisan agreement that Congress should provide tailored relief to local banks and credit unions. But we can't allow Republican leaders to use small banks as pawns to try to ram through controversial rollbacks of Wall Street reform," he said. "Democrats and the Administration won't allow Republicans to hijack must-pass legislation in order to gut the financial rules and consumer protections that the vast majority of Americans agree are needed."

Meanwhile, Democratic leadership and the White House have repeatedly warned they will block efforts at broader changes, and Sen. Elizabeth Warren, D-Mass., gave an impassioned speech on the Senate floor last Tuesday urging lawmakers to oppose any "goodies for Wall Street." The remarks were pointed at both Republicans as well as moderate Democrats who have signaled they could be open to a deal.

"Now, Republicans say: Hey, if you want to get something done, if you want to repair our roads or keep the government open, this is the price: help the big banks," Warren said. "To be fair, Republicans are also getting some help from some Democrats. They say: Wall Street accountability is important, but I just want to get something done around here for a change; so let's go along. Well, yes, I want to get something done too. Who doesn't? But I didn't come here to carry water for the big banks."

Warren led the defense last December against the near-repeal of the swaps "pushout" rule that was signed into law as part of a must-pass spending package. But the White House and some Democrats ultimately supported the revision in exchange for greater funding for the Securities and Exchange Commission and the Commodity Futures Trading Commission, which critics warn are chronically underfunded. Whether there's a similar deal to be had this time around remains unclear, particularly given broader fights over energy policy and women's health, among other issues.

"The key question is what the Democratic ask is — so if they get that, it doesn't blow the deal up," said Brandon Barford, a partner at Beacon Policy Advisors. "In this case, can you exempt institutions from heightened regulation in exchange for greater funding? I don't know how much money can solve that problem."

Regardless, progressives will be watching carefully to see what, if any, banking provisions making it into a final deal — particularly if relief is granted to any groups beyond the smallest community banks.

"You're going to hear a lot of huffing and puffing — that's expected," said Mark Calabria, director of financial regulation studies at the Cato Institute.

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