Lincoln Is Latest Lawmaker To Push For Home State Exemption From Financial Reform Rules

As part of the financial regulatory reform effort currently being hashed out in conference committee, banks will be required to hold more capital against losses. This is a key reform, as one of the big problems prior to the financial meltdown was that banks and other financial firms (like insurance giant AIG) were way overleveraged and didn’t have adequate capital on hand when the housing bubble burst.

The legislation before the conference committee applies more stringent capital standards to banks with more than $10 billion in assets. However, Sen. Blanche Lincoln (D-AR) wants to boost the threshold to $15 billion, conveniently exempting the biggest bank in her home state — which also just happens to be owned by one of her biggest campaign contributors:

The bank, Arvest Bank Group Inc., of Bentonville, Ark., is predominantly owned by the Walton family, of Wal-Mart Stores Inc. fame, perhaps the most influential family in the state and one of the richest in the U.S. Under Ms. Lincoln’s proposed change, Arvest would be excused from a provision that could require banks to raise more capital, in Arvest’s case about $115 million…Ms. Lincoln “believes the threshold should be high enough to ensure no bank in Arkansas is subject to these new rules on existing capital, which would hinder their ability to generate lending for consumers and businesses at a time when access to credit is already difficult to come by,” said Ms. Lincoln’s spokeswoman, Marni Goldberg.

This is, unfortunately, not the only case of lawmakers pushing to exempt financial firms in their home state from the new financial rules of the road. Sen. Scott Brown (R-MA), for instance, is pushing for an exemption to the Volcker rule — which prohibits banks from trading for their own benefit with federally insured dollars — for Massachusetts based State Street Corp.

These sorts of exemptions are problematic, even putting aside the politics of crafting special deals for powerful entities in a state, because they create pressure for lawmakers to raise the exemptions even higher and set up opportunities for regulatory arbitrage (banks moving activities to unregulated parts of the market.) “Once you open up the door just a crack, Wall Street shoves the door open and runs right through it,” said Frank Partnoy, a professor of law at the University of San Diego and a former trader at Morgan Stanley.

As former Federal Reserve Chair Paul Volcker has said, “the problem with making the exceptions with plausible cases by individual institutions is once you begin, you can never stop. And if you make enough exceptions, you no longer have a rule.” Capital requirements need to be stronger across the board if financial reform is to result in a more stable, safer financial system, and Lincoln’s home state bank doesn’t need special treatment.