How Big Banks Are Using Smaller Ones As Cover For Getting Out Of Financial Reform

Goldman Sachs CEO Lloyd Blankfein CREDIT: AP/MARK LENNIHAN
Goldman Sachs CEO Lloyd Blankfein CREDIT: AP/MARK LENNIHAN

At two hearings this week, banks lobbyists are set to plead their case for small bank “regulatory relief” to the Senate Banking Committee. Financial regulations and consumer protections, they will say, are hampering the ability of community banks to do their jobs and meet the credit needs of their communities. This is part of an effective strategy that big banks and their allies have started to deploy: framing their efforts to weaken financial reforms as help for small community banks.

It’s true that in some cases small banks should be treated differently by complex regulations. But financial reform already explicitly treats small banks differently, and they have already obtained key exemptions from financial regulations, with more to come.

Instead, small bank lobbies are frequently used to obtain a pass on consumer protection and financial reforms for banks of all sizes, not just small ones. All three groups that have been called to testify this week on small bank relief have targeted the new Consumer Financial Protection Bureau, calling for structural changes that would hamper its ability to protect consumers from abuses by banks of all sizes. The community bank and credit union lobbies have similarly pushed to exempt 99 percent of banks from consumer protection supervision. And all three lobbies are working to weaken reforms that protect borrowers from inflated fees and discourage lenders of all sizes from making the risky loans that fueled the financial crisis.

Bank lobbyists are already experiencing success in using the cover of small community banks to weaken other reforms that affect the entire market. Just last week, the House passed a bill aimed at preventing financial and other regulators from issuing new rules under the cover of “small business relief.” Concern for small banks has been used to attack numerous reforms that primarily affect the activities of Wall Street, from a prohibition on taxpayer backing of certain risky bets to the rule discouraging banks from betting with their customers’ money.

Knowing that the public is far more sympathetic to community banks than Wall Street, the country’s biggest bank trade group, which represents the largest banks

as well as smaller institutions, even recently launched an ad campaign to brand itself as “America’s Hometown Bankers.”

The reforms passed after the financial crisis are in trouble. In one of their first acts in this Congress, House Republicans voted to weaken the Dodd-Frank reform law designed to address the causes of the financial crisis, and the new Senate leadership has made it clear that weakening this law is among its top priorities.