Don't Let Big Banks Sabotage Reg Relief for Small Banks

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Congress is back in town and racing to complete its budget work before a looming Dec. 11 deadline. But rather than focusing on getting the job done, some in Congress are attempting to sneak special interest provisions into the budget.

In doing so, they risk shutting down the government. And to what end?

They'll tell you they're trying to help community banks. But what they've really got on their minds is helping big financial institutions and undermining consumer protection.

How, exactly? First, one provision would block the Federal Reserve from "stress testing" a bank for safety and soundness unless it is over $500 billion in size. This is not community banking relief. Fed stress testing already does not apply to more than 95% of banks, including the more than 6,000 banks in communities all across the country with under $10 billion in assets, the category commonly described as community banks. 

Fed stress testing currently applies only to the largest banks in the country, the 31 bank holding companies with assets of $50 billion and above. Why shouldn't the Fed stress test firms like Deutsche Bank Trust Corp. or State Street or Bank of New York Mellon or Capital One?

The Fed already uses a graduated approach to regulation. The largest, most complex financial institutions face the most stringent standards. The Fed, for example, imposes a supplementary leverage ratio, a countercyclical capital buffer and detailed liquidity coverage rules only on 14 firms with over $250 billion in assets. The very largest U.S. banks on a global basis, currently eight bank holding companies, are subject to even tougher standards, including capital surcharges, more stringent leverage ratios and long-term debt requirements.

A second provision would stymie the Financial Stability Oversight Council in its ability to make sure that shadow banks like Lehman Brothers and American International Group cannot escape oversight and strong capital rules simply by changing their corporate form. A key lesson of the financial crisis was that such firms could expose the United States to enormous risk. Dodd-Frank gave the FSOC the job of making sure such firms were subject to stringent oversight by the Fed. Now, some in Congress want to tie the FSOC's hands with onerous and unnecessary procedural hurdles. These hurdles are designed to weaken oversight of the largest shadow banks.

A third provision would impose a partisan commission structure on the Consumer Financial Protection Bureau in order to slow down enforcement and rule writing. The consumer agency, built from scratch in the last five years, is already doing a balanced and careful job protecting consumers from abusive financial practices. Its director, Rich Cordray, was overwhelmingly confirmed on a bipartisan basis after years of partisan bickering. Why would we want to go back to partisan fighting, rather than letting the agency do its job of protecting households from abuse?

Lastly, some members are seeking to block the consumer agency from effectively enforcing fair lending laws for auto loans. Minority and female car and truck buyers often pay more to borrow because of the discretionary markup policies of indirect auto lenders. The CFPB and the Department of Justice brought an action recently against Ally Financial, a large bank holding company, which settled the discrimination claims against it for $80 million. We should be stepping up enforcement so that we have a fair and open market, not rolling it back.

None of these changes will help — or even are about — truly small, hometown banks. There is undoubtedly much that could be done to reduce regulatory burden on the smallest banks. Small banks could benefit from clear safe harbor rules and short, plain-language versions of regulations that do apply to them. The Fed can continue to improve its tailored and graduated approach to supervision. Strong, compliant small banks should have longer examination cycles and streamlined reporting requirements. Regulators and the industry should come together in a task force to come up with better ways to catch terrorists and criminals who use the financial system, while imposing lower regulatory burdens on banks. And we need a level playing field for small business lending, so community banks can compete with nonbank providers to provide safe, transparent, consumer-friendly loans to small businesses and entrepreneurs.

It is hard enough to reach bipartisan agreement on the federal budget. The last thing anyone needs is for the lights to go out on Dec. 11 because special interests in the financial sector snuck dangerous provisions into a must-pass budget bill.

Michael S. Barr is a nonresident senior fellow at the Center for American Progress. He is also the Roy F. and Jean Humphrey Proffitt Professor of Law at the University of Michigan Law School. He previously served as assistant secretary of the Treasury for Financial Institutions, 2009-10.

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Law and regulation SIFIs Dodd-Frank Community banking