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Reform or Rollback?

Eakinomics: Reform or Rollback?

Yesterday, the Senate Committee on Banking, Housing and Urban Affairs held a markup of the “Economic Growth, Regulatory Relief and Consumer Protection Act.” As noted by Chairman  Mike Crapo, “Introduced by 10 Republicans and 10 Democrats, including 13 members of this committee, this package of commonsense reforms recognizes that it is important to tailor regulation appropriately, especially for community banks, credit unions and regional banks.” Put differently, it is a bipartisan effort to improve the legislation (the Dodd-Frank Act) underneath a hot-button issue (financial services regulation) — a very unusual moment in Washington.
That hardly means it is universal kumbaya at the Banking Committee. Ranking Member Sherrod Brown took to CNN to blast the bill as a dangerous rollback of Dodd-Frank and, implicitly, his fellow Democrats as misguided in their sponsorship of the bill.  What, exactly, are the issues?
AAF’s Meghan Milloy summarizes the legislation nicely. It has some modest modifications to mortgage origination and rolls back some of the burdensome regulations that have hurt small community banks the most — notably the the Volcker Rule and the leverage ratio rules (for banks with less than $10 billion in assets). It responds to the Equifax breach by requiring the credit bureaus to provide consumers one free freeze alert and one free unfreeze alert each year.
The heart of the bill, however, is to raise the threshold at which bank holding companies fall under the enhanced prudential standards from $50 billion in assets to $250 billion in assets. This is immediate for banks between $50 billion and $100 billion and becomes effective in 18 months for the remainder. The bill also gives the Federal Reserve the authority to apply enhanced prudential standards after the date of enactment, to conduct periodic stress tests and to exempt firms from the enhanced prudential standards before the 18-month threshold.
Theses are sensible moves — hardly a rollback of Dodd-Frank. But they are also a long way from radical reform. As AAF has noted in its work on non-bank systemically important financial institutions, arbitrary, size-based regulation does not always make sense. It would be better to conform bank and non-bank regulation under the umbrella of an activities-based approach to identifying risk. The Banking Committee is moving on fixing Dodd-Frank in a non-partisan fashion, but there is a lot more that could be done.


Fact of the Day

The Puerto Rico Electric Power Authority, which is subject to the governor and the political party in power at any given time, currently holds $9 billion in debt and filed for bankruptcy a few months ago.