The Senate will vote on a bill Tuesday that’s being touted by supporters as much-needed regulatory relief for small community banks — a sales pitch that conjures images of tellers greeting longtime customers by name as they kick farm dust off their boots at the door.
But the companies that will benefit most from the bill don’t fit that casting call. They’re gigantic — large enough, in most cases, to have an entire sports venue named after them. These “stadium banks,” as one Senate staffer dubbed them to The Intercept’s David Dayen, are masquerading as small retail banks in order to swindle lawmakers into weakening vital economic protections.
The bill seeks to change the definition of a “systemically important financial institution” to favor such companies. The SIFIs were targeted for stricter oversight in the Dodd-Frank Wall Street reforms passed in 2010, following the 2008 financial crisis. Since the bill kicked in, financial institutions with $50 billion or more on their balance sheets have had to keep more cash on hand and submit to biannual “stress tests” to gauge how they’d handle a repeat crisis. The new legislation would quintuple the threshold at which those safeguards kick in — scrutinizing only those with $250 billion or more in assets. Tests would be less frequent and less stringent even on the handful of companies that still had to take them.
But that’s just the headline harm, and we’ve known it was coming since last fall. The deeper details of the legislation would gut efforts to combat housing discrimination, make it easier for massive foreign banking companies to work around the tighter U.S. rules, and set the stage for a repeat of the 1980s Savings & Loan crisis by ending consumer safeguards in lending for the smallest banks.
The bill is a bizarre 10th birthday present to the massive financial crisis that prompted the new rules in the first place when it spilled over from the investment world to cripple the real economy and tank the class mobility of hundreds of millions of families.
In these heady days of Trumpian flailing and #resistance theatrics, you might expect Democrats to fight back against an effort to gut critical technicalities from the Dodd-Frank Wall Street reforms. But that’s not how the history of financial deregulation works. This time, as every time, the bankers are relying on a large minority of the Democratic caucus in the Senate to get their wish-list passed. Thirteen of them stand ready to help Majority Leader Mitch McConnell (R-KY) break a filibuster that would likely be led by Sen. Elizabeth Warren (D-MA).
It’s an old strategy that the banking industry has profited from over and over again: Some number of relatively conservative Democrats will always join with ideologically anti-regulation Republicans to pass attacks on the rules and agencies aimed at policing Wall Street. Monday morning, the old strategy appeared to have worked anew: “Victory in sight for Democrats defying Warren on banking bill,” Politico declared. In the story under that headline, one of those “Democrats defying Warren” quoted is Sen. Jon Tester (D-MT), who seems to believe that racking up bipartisan accomplishments is a surer path to re-election than defying the White House.
Section 402 of the bill is the locus of much wonky wrath. There, the authors propose a key change to how megabanks calculate the cash-on-hand figures required to meet Dodd-Frank’s capital requirements. Exemptions in the bill would allow certain banks to run a far larger share of their trading and legalistic wagering with debt as fuel. Leverage — the degree to which a bank’s overall business is backed by debts rather than hard equity assets — would be allowed to jump tremendously at such firms. The argument for this is that “custodial” assets are eminently safe, and so should not count as leverage in the same way.
But what does “predominantly engaged” mean? That would be up to banking regulators to decide after the fact. The phrase was inserted in committee earlier this year after a handful of the largest bank companies, including Citigroup, criticized an earlier draft that would have conferred the deregulatory benefit on just two or three firms. The unwritten rules that would pin down access to the newly relaxed math would almost inevitably favor Citi and other massive, aggressive financial firms that have as much in common with the hayseed credit unions as a squid does with a giraffe.
Anything that makes it easier for firms like Citi to rely more on leverage will also make a repeat crisis somewhat more likely. And if such changes coincide with a move to do less stress testing at fewer firms, as this bill mandates, the risk of a new collapse is even larger.
Section 402’s wormhole for deregulatory plunder to Citigroup and its ilk is murky, both complex and dependent on future regulatory choices. The bill’s other main sins are crystalline in their simplicity.
Housing discrimination law is already notoriously difficult to enforce. Plaintiffs must make exhaustive shows of data-driven evidence to get a court to see how they were denied credit that was made available to others with no superior qualifications but a different demographic tag. That data is already difficult to obtain. The Senate bill would ensure that most of it stops being generated at all.
The bill ends Dodd-Frank requirements for housing lenders to track the credit scores, loan-to-value ratios, and other key metrics associated with the mortgages they make, provided the lender is small enough that it makes 500 or fewer loans per year. The logic behind the eased data tracking rules for small lenders is that a lender who keeps his own skin in the game has no incentive to deceive customers and therefore doesn’t need to be policed for discriminatory practices.
But six out of every seven banks and credit unions in the country would qualify. The end of data collection on markers of discriminatory lending would negate everyone’s ability to make a discrimination case against the other categories of lenders — the big boys who are not, according to the public sales pitch here, supposed to be getting any favors off of Congress in this legislation. Someone trying to sue one of the 15 percent of banks who does have to keep tracking discrimination data would find it nearly impossible to draw vital comparisons in a statistically valid way if there is no data for the lending done by the other 85 percent of the banking business.
Even the provision in the bill with the most lucid little-guy logic sets up frightening dominoes for future toppling. The package would allow the same small lenders to stop complying with the stricter underwriting rules in Dodd-Frank, known as ability-to-repay. So long as a bank keeps a mortgage on its own books instead of selling it on to the big guys, it doesn’t have to worry about ability to repay paperwork.
This is the meat-and-potatoes deregulation that the bill’s advocates in both parties are pointing to as proof it eases undue burdens on noble community banks rather than handing out favors to the villains of the last crisis. But it doesn’t take malice from small lenders for this to turn out awful — just a swing in overall interest rates that coincides with a factory closure or regional economic downturn, putting these little-guy lenders into insolvency and generating a new crisis.