Big Banks Were Meant to Gain From Bipartisan Deregulation Bill All Along, Senate Letter Reveals

Congress swore that its Dodd-Frank reform was only intended to benefit put-upon community banks and credit unions. Now that it's become law, they don't need to pretend anymore.

UNITED STATES - MAY 8: Sen. David Perdue, R-Ga., speaks during a press conference about Congress' current work pace, government funding, and the confirmation backlog on Tuesday, May 8, 2018. (Photo By Bill Clark/CQ Roll Call) (CQ Roll Call via AP Images)
Sen. David Perdue, R-Ga., speaks during a press conference about Congress' current work pace, government funding, and the confirmation backlog on May 8, 2018. Photo: Bill Clark/CQ Roll Call/AP

Democrats who collaborated on the bank deregulation law passed earlier this year have categorically insisted that it only benefits small community banks and credit unions.

Take Sean Patrick Maloney, a House Democrat who is simultaneously running for both re-election and New York attorney general — the so-called Sheriff of Wall Street position. He was asked recently on a local radio show about his yes vote.

“If you look at the African-American Credit Union Association and the African-American small bankers, they are the guys who benefited from easing some of the restrictions,” Maloney said, using lenders of color as a shield for his vote. Maloney maintained that the legislation “didn’t touch any of the important restrictions we put on the big banks.” It’s been his go-to refrain each time he’s been pressed on the Dodd-Frank rollback, echoing a chorus of lawmakers singing songs of sincere deregulatory innocence.

But a letter sent by seven Senate Republicans last week suggests that the law is trying to do precisely what its critics warned: provide regulatory relief for some of the largest banks in the country.

The letter, headlined by Senate Banking Committee member David Perdue, R-Ga., is a classic Washington document, “signed” by members of Congress but transparently prepared by lobbying groups looking to add congressional backing for their priorities. While the bill’s author, Senate Banking Committee Chair Mike Crapo, R-Idaho, isn’t on the letter, that’s likely because it would be messy to have the senator who promised Democrats in negotiations that big banks wouldn’t benefit from the legislation turn around and assist the lobbying efforts of those very institutions.

The shadow authors of the letter represent banks holding between $100 billion and $250 billion in U.S. assets. Twenty-five of the 38 largest U.S. banks fall into this category. They have become known on Capitol Hill as the “stadium banks,” because they’re not quite big enough to be called a megabank, but big enough to buy the naming rights to a stadium.

The stadium banks, which include the U.S. subsidiaries of foreign-run banks, want to make sure the Federal Reserve wipes out all enhanced regulatory standards established in Dodd-Frank for firms of their size. The bank deregulation law allowed for such a circumstance, with 17 Senate Democratic caucus members and 33 House Democrats signing on. Now Senate Republicans want to encourage the Fed to finish what Congress started.

This could prove tricky for Democratic supporters of the bank deregulation bill, such as Maloney or Delaware Sen. Tom Carper, who faces a tough Democratic primary challenge from Kerri Harris. Carper has already faced questions this election season about why he supported dismantling Wall Street protections and has cited his support of community banks as his motivation. “Among the people that have pushed hardest for me to support the legislation are, believe it or not, credit unions and community banks,” Carper told The Intercept while the Senate was deliberating.

But under S.2155, called the Crapo bill because of its lead author, the threshold for enhanced regulatory standards was lifted immediately for banks with between $50 billion and $100 billion in assets, and within 18 months for banks up to $250 billion. These enhanced regulations include extra capital and liquidity requirements, stress tests, and souped-up risk management. Most experts saw this as the part of the legislation that would have the most impact.

The Crapo bill provided a “safety valve,” giving discretion to the Federal Reserve to reapply certain enhanced standards to banks between $100 billion and $250 billion, if they found them to create systemic risk. Randal Quarles, the Fed’s vice chair for financial supervision, addressed this in July at a conference of the American Bankers Association.

While Quarles stated that capital and liquidity requirements should remain for these firms, those requirements should be less stringent, along with less frequent stress tests and no “living wills” requirement for mapping out how to unwind the firms if they get into trouble. Quarles added that even less complex and interconnected firms above the $250 billion threshold could get some requirements eased, as the legislation allows.

The speech was broadly in line with the deregulatory bent of removing rules for the largest U.S. banks. But the fact that Quarles didn’t immediately endorse removing all enhanced standards panicked bank lobbyists, who immediately ran to their allies in Congress to impress their views upon the Fed.

“It is the understanding of my colleagues and me that S.2155 shifted the assumption that financial companies with less than $250 billion are not systemically risky,” wrote Perdue and his six Senate Republican co-signers to Quarles on August 17. “The section also allows the Fed to adequately tailor regulations beyond the $250 billion asset threshold because companies do not suddenly become systemically risky when they cross an arbitrary asset threshold.”

This is a contested claim. Several financial firms in the $100 billion to $250 billion range were critical to the subprime crash and were bailed out, including National City, GMAC, and Countrywide. Going back further, if you adjusted Continental Illinois’s size for inflation when it received a federal bailout in 1984, it would fall in the $100 billion to $250 billion range.

But Perdue and his colleagues are not only asking for the elimination of all enhanced regulations below $250 billion, but even for help to those banks with more than that. This special pleading upsets the delicate claim that the Crapo bill only benefited community banks.

In a bit of a giveaway, the American Bankers Association immediately welcomed the letter, using very similar language as the senators — or, more likely, the senators were using the same language as the ABA. “ABA has been a longtime advocate for tailoring regulation to a bank’s business model and risk profile, as opposed to relying on arbitrary asset thresholds — a principle now enshrined in law,” said ABA Executive Vice President Wayne Abernathy.

The Senate Republicans want Federal Reserve-administered stress tests completely eliminated for banks under $250 billion, as well as the main liquidity rule that ensures banks have enough cash to operate under a hazardous scenario. They also repeatedly indicate that they don’t see “arbitrary” asset thresholds as sound, urging the Fed to lighten the rules above that threshold as well.

Finally, the letter asks that foreign banks’ U.S. operations receive “comparable regulatory treatment” to U.S. banks of the same size. This was a topic of some debate during deliberations on the Crapo bill, with opponents of the bill warning that practically all foreign bank subsidiaries (every one but HSBC has less than $250 billion in U.S. assets) would get their regulatory standards loosened. Bill supporters like Jon Tester, D-Mont., called this a “myth.” But his fellow supporters on the Republican side want to turn that so-called myth into reality.

Lifting regulatory standards on some of the biggest banks in the world, which happen to have giant rap sheets full of alleged misconduct like foreign exchange and interest rate manipulation, money laundering, tax evasion, transactions with sanctioned countries, mortgage fraud, and illegal repossessions from active-duty servicemembers, would further weaken the claims that the Crapo bill only affected small banks, rather than bestowing gifts on undeserving behemoths.

While Crapo did not co-sign the Perdue letter, Senate Banking Committee members Thom Tillis of North Carolina, Jerry Moran of Kansas, and Mike Rounds of South Dakota lent their names to it. Both Republican senators from Oklahoma, James Inhofe and James Lankford, and Louisiana Republican Bill Cassidy rounded out the letter.

Top photo: Sen. David Perdue, R-Ga., speaks during a press conference about Congress’s current work pace, government funding, and the confirmation backlog on May 8, 2018.

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