Banking rules set to slacken in Senate
WASHINGTON—The Senate is expected to soon approve the most significant bipartisan rollback of postcrisis financial rules since Republicans took control of Washington last year.
The bipartisan legislation, supported by the Trump administration and top Federal Reserve officials, would relax dozens of rules for small to medium-size banks, shaking up the banking sector with policy changes that could encourage deal-making and make it easier for banks to expand.
Senate Majority Leader Mitch McConnell (R., Ky.) on Thursday took a procedural step to bring the bill to the floor early next week. The legislation has the Democratic support needed to clear the chamber after about a week of debate. The House would take up the plan next, possibly adding more deregulatory measures that have already cleared the chamber by a wide, bipartisan margin. Supporters aim to enact the bill before November’s midterm election.
A central piece of the bill could relieve about two dozen regional banks from stricter rules put in place by the 2010 Dodd-Frank financial law, which sought to prevent another financial crisis with restrictions across the industry. The bill will raise the threshold at which banks face tighter oversight to $250 billion in assets from the current $50 billion—a victory for midsize banks, which have long said they shouldn’t be lumped in with the largest banks.
Supporters say the plan would boost lending by relieving all but the largest U.S. banks from the law’s toughest aspects. One result: banks that have stayed under the $50 billion line to avoid enhanced oversight would be in play for mergers or acquisitions with other firms, possibly creating larger regional banks.
While the bill will affect the entire industry, smaller banks will see the biggest changes, benefiting from eased compliance and paperwork requirements, particularly around mortgages.
Bank stocks have soared since the 2016 election, thanks to deregulatory expectations. But banking executives have started to wonder if the promises would materialize, prompting them to hold off on some investments.
“There was a wait-and-see approach over whether there would be more deregulation,” said Vincent Caintic, an analyst at Stephens Inc.
The Trump administration came to office vowing to take a friendlier tone toward the financial-services industry after years of tough Obama-era regulations. Legislative efforts have advanced slowly, particularly in the Senate, where Democrats retain enough seats to block most deregulatory efforts. Still, Congress has repealed some rules using the Congressional Review Act, which allows lawmakers to nullify specific regulations with a simple majority vote. In a victory for the industry, Congress last year overturned a rule by an Obama-appointed financial regulator that would have made it easier for consumers to sue banks in groups. But broader efforts to ease financial rules have failed to gain traction.
The latest bill’s opponents, who include liberal Democrats and former Obama administration policy makers, say it will inject more risk into the financial system at a time when the markets are volatile and banks are enjoying strong profits.
“A decade after the financial crisis, working families are still recovering, while Wall Street is making record profits and benefiting from a massive tax giveaway,” said Sen. Sherrod Brown of Ohio, a leading opponent of the bill. “I’m not willing to risk a taxpayer bailout in order to juice the payouts to executives and shareholders of the biggest banks.”
The legislation could lighten the regulatory burden for banks such as Zions Bancorp in Utah and M&T Bank Corp. in Buffalo, N.Y. Those banks in recent years have had to submit to detailed financial and risk exams, known as stress tests, to be able to pay dividends to shareholders. The Fed has already eased stress tests for midsize banks , but Dodd-Frank limits the Fed’s reach because it spells out that all banks above $50 billion in assets must face stricter rules. By effectively raising that threshold to $250 billion, the new legislation would give regulators more space to lighten the load.
Still, midsize banks have already spent years rejiggering their risk practices and other systems to conform to postcrisis rules—systems they are unlikely to dismantle, even if Dodd-Frank were to be replaced with a new financial law.
“We’re not going to stop stress testing our portfolio,” said Greg Carmichael, chief executive of Fifth Third Bancorp, a Cincinnati-based bank that has roughly $142 billion in assets. “But we will welcome the opportunity to not submit 20,000 pages every year.”
Shares in New York Community Bancorp, with assets of about $49 billion, rose more than 5% on the day the Senate released its original proposal in November and have continued to edge upward. The bank has said it hopes that lawmakers change the $50 billion line so that it can more easily do deals.
“This is the answer to New York Community Bank’s prayers,” said Abbott Cooper, a portfolio manager at Hilton Capital Management who invests in regional banks.
First Horizon National Corp. in Memphis, Tenn., last year bought a smaller bank that pushed its total assets up to about $41 billion. In an interview, CEO Bryan Jordan said that changing the threshold would make another merger “a whole lot more palatable.”