WASHINGTON — Lawmakers from both parties asked experts Tuesday if institutions with less than $10 billion of assets should be exempt from Dodd-Frank regulations, signaling a possible bipartisan compromise that could significantly boost the chances for regulatory relief.
Republicans have blamed tougher regulatory requirements for a decline in the number of community banks and credit unions, while Democrats have insisted that many of those steps were necessary to safeguard the financial system.
During a Senate Banking Committee hearing on Tuesday, however, lawmakers on both sides sought input on the impact of a broad carve-out for small institutions.
“Given the regulatory costs and the impact on lending and the forced consolidation that has gone on in community banks, I would like to get your thoughts on whether it would be appropriate to exempt community banks $10 billion or less from Dodd-Frank,” Sen. John Kennedy, R-La., asked a panel of banking experts.
Sen. Jack Reed, D-R.I., agreed that asking whether to exempt small institutions from Dodd-Frank was “a very good question” and used his allotted time on the panel to seek answers.
Some witnesses at the hearing, several of whom were former regulators, appeared to endorse the concept.
“That is a very good idea that really needs to be explored,” said former Federal Reserve Board Gov. Robert Heller. “I am in favor of exempting them from the regulations as long as they are well managed as determined by the regulators and they have a sound level of capital.”
Heller cited International Monetary Fund studies that suggest that banks with a capital ratio between 10% and 15% would be considered well managed, and that the marginal benefit of additional capital “is very close to zero” as banks with that level of capital “basically” don’t fail.
House Financial Services Committee Chairman Jeb Hensarling’s Financial Choice Act, as introduced in the previous Congress, would grant banks an “off-ramp” from complex regulations in return for holding a 10% leverage ratio.
Democrats theoretically may be able to get behind that concept, but many other provisions of Hensarling’s bill, including his provisions to restructure the Consumer Financial Protection Bureau, are nonstarters for progressive lawmakers.
Senate leaders like Chairman Mike Crapo, R-Idaho, and Sen. Sherrod Brown, D-Ohio, could conceivably agree on a package that includes similar requirements without the more controversial measures. But neither lawmaker have committed to such a plan so far.
Former Federal Deposit Insurance Corp. Chairman Donald Powell endorsed the concept.
“The burden of Dodd-Frank needs to be exempt to these smaller institutions without compromising capital ratios and compromising liquidity,” he said.
He also specifically cited the qualified mortgage rule and data collection requirements as particularly unnecessary for community banks.
But not everyone on the panel said they supported an exemption.
“Our experience is that community banks are a spectrum; they are not all wonderful,” said Deyanira Del Rio, co-director of The New Economy Project, an economic justice center. “A wholesale exemption is not something that I would support.”
Del Rio is also on the board of the Lower East Side People’s Federal Credit Union, a community development financial institution that she said already has “certain accommodations,” including exemptions from QM requirements.
William Spriggs, a professor of economics at Howard University and chief economist at AFL-CIO, also said he believes the current regulatory construct is flexible for small institutions and that megabanks pose a bigger threat to community banks.
“The greatest threat to community banks is that we continue to have banks [that are] ‘too big to fail’ dominate the market,” Spriggs said. “We need them broken up so that that will create more space for community banks to thrive and prosper.”
Sen. Elizabeth Warren, D-Mass., said she supports cracking down on the biggest banks, but not rolling back regulations.
“Reining in the big banks is good for financial stability and avoiding bailouts, and it’s good for the economy,” Warren said.
“Our job here on this committee is to advance policies to make the economy grow, not policies to make big banks even bigger," Warren said. "There is no trade-off here between regulation and growth. They work hand in hand if done right, and I hope that will be the focus of this committee.”
But Sen. David Perdue, R-Ga., said if the goal is to break up the banks, Dodd-Frank has created perverse incentives that have led to the merger or acquisition of 90 banks from his state since 2009.
“What we have done is incented the consolidation in an industry where we want to break up banks in theory, when in reality we have done just the opposite,” said Perdue, who added that capital requirements for small regional banks may already be too stringent. They're “well beyond any reasonable" level, he said.
Newly elected Sen. Catherine Cortez Masto, D-Nev., said that she wouldn’t favor a “wholesale rollback of Dodd-Frank” but that she may support a targeted bill.
“There are times that I think we do over-regulate,” she said.
