Senator Mike Crapo (R-ID), Chairman of the Senate Banking Committee, spearheaded a major rollback of the 2010 Dodd-Frank Act: The Economic Growth, Regulatory Relief, and Consumer Protection Act. The Crapo Bill was a recent topic of hot debate which had passed in the Senate, has now passed unchanged in the House, and has morphed into the Bank Lobbyist Act.
Paul Ryan (R-WI), the House Speaker, said the bill’s passage was a step toward “freeing our economy from overregulation… Our smaller banks are engines of growth … By lending to small businesses and offering banking services for consumers, these institutions are and will remain vital for millions of Americans who participate in our economy.”
Representative Nancy Pelosi (D-CA), the Democratic minority leader, disagrees, “It’s a bad bill under the guise of helping community banks …The bill would take us back to the days when unchecked recklessness on Wall Street ignited an historic financial meltdown.”
To cut costs, between 2012 and 2017, Capital One cut 32% of its branches while SunTrust slashed 22%, including about half of its locations in rural areas. Since 2009, 137 community banks in California have closed.
The truth is Dodd-Frank was not great for banking as a whole. And the high cost of compliance it demanded seriously hurt our community banks. However while it looks as if the days when Dodd-Frank had a stranglehold on banks may be over, we may have been sold some spin.
A Harvard University working paper released in early 2015, argues Dodd-Frank is the culprit contributing to fewer community banks. They simply could not keep up with the cost of compliance. The number of community banks has fallen by two-thirds in the last 30 years.
The Crapo Bill hammers away at capital and leverage requirements and gives a green light to larger regional banks to scoop up smaller community banks. Under the guise of helping community banks, the bill may actually allow for bigger banks to grow even larger.
In fact, by loosening regulations on medium sized banks it may be encouraging a rush of consolidation so even more community banks will disappear.
Just the day after the Senate passed the deregulation bill in March, Wells Fargo analyst Mike Mayo told CNBC: “We absolutely expect bank consolidation to accelerate.” The reason? Banks no longer face the prospect of stricter and more costly regulatory scrutiny as they grow.
Although the bill is praised by many as only providing relief for the community banks, there are also many very subtle changes in this bill that will actually provide relief to the megabanks. One such change reduces capital requirements for “custodial banks” with language allowing most of the large banks to possibly take advantage of this provision. Another changes the frequency of the mandated stress tests and the number of stress scenarios required.
Previously, banks over $50 billion in assets fell into that megabank category. The bill moves the threshold to $250 billion—a 400 percent jump that erases the mandate of enhanced scrutiny for 25 of the 38 largest banks in the country.
Yes, change to Dodd-Frank was sorely needed. And Wall Street and its lobbyists had already whittled down the 2010 Dodd-Frank financial reform legislation by a thousand cuts. The bill was originally passed to largely reign in egregious behavior, primarily by the big banks leading up to the 2008 financial crisis, but it unfortunately imposed heavy burdens on community banks, especially in regards to compliance. Some assert that the very rule which was formulated to curb the “too big to fail,” instead created a system of “too small to succeed.”
So Dodd-Frank turned out to be a real gift to the banking giants, which have many more resources to cope with increased regulation. It could be argued the big banks have grown larger as a result. The three largest — J.P. Morgan, Wells Fargo and Bank of America —now hold 32% of deposits, up from 20% in 2007. About 45% of new checking accounts last year were opened at one of the big three.
This bill has been sold to the public on the grounds that it eliminates some constraints on the high cost of community banking but, in my opinion and others, the new $250 billion threshold is an overreach.
Guess we have not yet learned that breaking up the TBTF and largely deregulating many of the remaining banks may be the right path to take. Until this is done the largest of the banks will still have the lobbying muscle to continue to further weaken those provisions of Dodd-Frank pertaining solely to them, thus increasing the chances that the largest banks will again lead our country into another financial crisis.
If you’d like to read more about the details of how many of the subtle changes in this bill benefit the TBTF, I recommend this article in The Intercept.
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Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
