Community and regional banks across the United States are badly in need of regulatory relief. A bill proposed by Sen. Richard Shelby is poised to give it to thembut it is in need of one important change.
The Senate Banking Committee is scheduled to take up Sen. Shelby's Financial Regulatory Improvement Act of 2015 this week. The bill would fix at least some of the problems that the Dodd-Frank Act has caused for community and regional banks and their customers, without undermining the law's objectives of protecting consumers and ensuring the safety of the financial system.
Of the "fixes" contained in Sen. Shelby's bill, most are narrow and unlikely to provoke controversy or alarm. Two provisions stand out among all the rest.
In my view, the bill's most important reform would raise the asset threshold for designating banks as systemically important financial institutions from $50 billion to $500 billion. Under Dodd-Frank, many regional banks were placed into the "one size fits all" category of SIFIs and subjected to the same regulatory standards as global giants such as Goldman Sachs, JPMorgan Chase, Citigroup, Deutsche Bank and Barclays. Even banks below $50 billion in size have been subjected to substantially greater regulatory burdens, as it is second nature for regulators to apply across the board what they perceive Congress has labeled as "best practices."
Dodd-Frank's clumsy application of SIFI designation to community and regional banks has harmed economic growth in towns and cities throughout America and has made it very difficult for middle-class Americans to access much needed credit on reasonable terms.
Raising the asset threshold would address this issue while still allowing the government to apply enhanced supervision to banks with assets between $50 billion and $500 billion on an as-needed basis, subject to their level of financial risk as determined by regulators. This reservation of regulatory authority to designate firms under $500 billion in size as SIFIs is an important detail that has been overlooked or ignored by critics of the bill.
However, I am concerned about the legislation's controversial provisions relating to Fannie Mae and Freddie Mac, which have little if any nexus to regulatory reform. Deciding what to do with Fannie and Freddie is an extremely important public policy task for the government, and the next step should not be tucked away in an unrelated regulatory reform measure. Disturbingly, some provisions contained in the proposed Senate bill would undermine the Housing and Economic Recovery Act of 2008, the statute that governs the government-sponsored entities.
In 2008, when Fannie and Freddie fell into distress, Congress passed HERA and established the Federal Housing Finance Agency as an independent conservator for them. As conservator, the FHFA is required to "preserve and conserve" Fannie and Freddie for their shareholders. But that's not at all what has happened.
In 2012, the Treasury Department changed the terms of the conservatorship to take 100% of Fannie and Freddie's profits into the Treasury's general fund, with no accountability to Congress or the public as to how this money is spent. Treasury's illegal profit sweep has had the perverse effect of keeping these institutions, which are SIFIs by any definition, permanently undercapitalized and in limbo. For Congress to lock in this arrangement until it decides what to do with Fannie and Freddie which is what Title VII of the current bill would do is terrible public policy, harmful to investors, taxpayers, and the financial markets.
It's clear that Congress needs to take action to determine the fate of Fannie and Freddie. These institutions are now entering the seventh year of a conservatorship that was intended to be temporary. But deciding what to do with Fannie and Freddie merits an entirely separate policy discussion and should not be a quick-and-dirty afterthought to an important regulatory relief bill.
The goal of our housing policy should be to get more private capital into housing finance. Sen. Shelby made this point recently, stating on Bloomberg TV that "we need to get Fannie and Freddie back running on their own, without the government's help." But in order for private capital to show up, the government must honor the law and live by the agreements it makes.
A sensible path forward would be to remove Title VII completely from the Senate bill and to take up GSE reform separately. Given the indications that the Treasury and FHFA have not acted as required by HERA in administering the conservatorship, the Senate Banking Committee should begin the process by conducting hearings on HERA oversight.
Chairman Shelby's reform legislation is extremely important. Something like it without the provisions concerning Fannie and Freddie should be enacted immediately. Then Congress needs to turn its full attention to addressing the future of the GSEs and our nation's housing policy.
William M. Isaac, former chairman of the Federal Deposit Insurance Corp., is senior managing director and global head of financial institutions at FTI Consulting. Mr. Isaac and his firm provide services to many clients, including some who may have an interest in the subject matter of this article. The views expressed are his own.