WASHINGTON — Even though the bipartisan regulatory relief bill passed by the Senate Banking Committee Tuesday has numerous steps before becoming law, the panel's approval of the package was still a landmark moment.
The committee's vote of 16-7 in favor of the bill not only was a rare moment of bipartisanship, but unlike past efforts to water down the Dodd-Frank Act, lobbyists are optimistic that this one will succeed.
Yet the committee passage is just that; the bill still needs to go to the full Senate where the process could entail extended debate and amendments. Beyond that, the House would need to agree with whatever version the Senate has finalized.
Below are key questions about the next legislative steps and the potential impact of the bill:
Does the committee's approval of the bill ensure Senate passage?
It might. The bill's margin of support out of committee reflects the support from key Democrats, which is essential to meeting the required 60-vote threshold in the full Senate.
Three moderate Democrats on the panel — Joe Donnelly of Indiana, Heidi Heitkamp of North Dakota and Jon Tester of Montana — negotiated the package with Senate Banking Committee Chairman Mike Crapo, R-Idaho. Virginia Democrat Mark Warner also voted for the bill.
Altogether, 11 Democrats and Angus King, I-Maine, have signed on to support the bill as well as 10 Republicans, indicating that it has more than enough support to pass the Senate.
The bill’s supporters also showed incredible restraint during the bills markup, voting down numerous amendments, many of which members of the panel supported.
“The reasoning of the bill’s supporters in rejecting the amendments was essentially the theory that you can’t eat only one potato chip,” wrote Ian Katz, an analyst at Capital Alpha Partners in a note to clients. “The discipline showed by the moderate Democrats is a good sign for the bill’s prospects. It demonstrates that they are committed to resisting the temptation to tinker too much with a bill that several of them described as good but far from perfect.”
Still, the committee's debate indicated that the bill could change on its way to a full Senate vote. Crapo could offer a manager's amendment with technical changes or less controversial provisions before the legislation goes to a vote. On the floor, individual members could offer their own amendments, which could change the dynamic depending on the level of support for changes.
What happens after it passes the Senate, if it passes?
The Senate would have to then negotiate with the House on a final legislative version.
This is more complicated than it sounds. The two chambers have been far apart on regulatory relief, with the House — which only needs a simple majority to pass legislation — supporting more ambitious regulatory relief.
The industry would actually prefer the House vision for financial reform. The Financial Choice Act, authored by House Financial Services Committee Chairman Jeb Hensarling, passed the House in June and would go much further than the Crapo bill.
One scenario is that the House and Senate establish a conference committee, and the resulting deal resembles the Senate bill — in order to gain necessary Democratic support.
Some of the provisions of the Senate bill borrowed from discrete House bills that had bipartisan support. After Hensarling's Choice Act was viewed as too extreme by the Senate, he started to break up the package, passing narrower pieces of legislation.
Still, it is not completely clear if Hensarling, who once said “I will not rest until Dodd-Frank is ripped out by its roots and tossed on the trash-heap of history,” will support the targeted Senate plan. He appears to have moderated his position, but still plans to use his bargaining chips.
“I look forward to going to conference with” the Senate, Hensarling told Bloomberg news last week. “I have no doubt that the Senate will get their way on a number of matters, but I would expect the House to get their way on a few matters.”
Why is this regulatory relief effort faring better than other past ones?
The Senate bill so far has avoided relatively extreme provisions to roll back Dodd-Frank, like those supported in the House, that would lose Democratic support. Following years of negotiations, Crapo and Democrats settled on a package that could be endorsed by both sides.
But other political factors have added to the bill's momentum. President Trump has promised to deregulate, whereas President Obama likely would have vetoed a bill making significant changes to the sweeping regulatory reform bill his administration helped pass in the wake of the financial crisis.
There are also a number of Democrats up for reelection in states carried by Trump, including Donnelly, Heitkamp and Tester.
What can banks expect if the legislation passes?
The bill is a significant win for small and medium sized banks.
It raises the Dodd-Frank asset threshold for being a "systemically important financial institution" $50 billion to $100 billion immediately, and then to $250 billion after 18 months.
Banks have long said that the so-called SIFI threshold is arbitrary and way too low. Banks that are designated as SIFIs are subject to an onerous stress-testing regime and stricter capital requirements, and have to file annual resolution plans known as “living wills.”
The additional regulatory requirements of crossing the cutoff are costly enough that a number of banks have resisted going over the $50 billion-asset threshold.
Medium sized banks are also welcoming a change to a separate threshold for completing company-run stress tests. The deal agreed to Tuesday would only make banks above $250 billion go through the exercise. Previously, the requirement applied to banks above $10 billion in assets.
Community banks with less than $10 billion get the most out of the deal. They are provided an “off-ramp” from capital and liquidity requirements if they have a leverage ratio between 8% and 10%, and are exempt from the proprietary trading ban called the "Volcker rule" if they hold minimal trading assets. For banks below that threshold, certain mortgages held on portfolio are also automatically considered a “qualified mortgages” under Consumer Financial Protection Bureau’s underwriting rules.