The Senate is preparing to scale back the sweeping banking regulations passed after the 2008 financial crisis, with more than a dozen Democrats ready to give Republicans the votes they need to weaken one of President Barack Obama’s largest legislative achievements.
Congress’s appetite for pulling back bank regulations shows the renewed clout of the financial sector in Washington, not just in the GOP but also among Democrats. Eight years after nearly every Senate Democrat backed a sweeping set of new rules for financial firms large and small, the party is now split, with moderates, several of them facing tough midterm election contests, working with the opposing party.
The core of the new bill exempts about two dozen financial companies with assets between $50 billion and $250 billion from the highest levels of scrutiny by the Federal Reserve, the nation’s central bank. Supporters argue that the legislation would bring much-needed relief to midsize and regional banks that were treated like their much larger counterparts under the 2010 legislation known as Dodd-Frank. Opponents say it would weaken the oversight needed to stave off the type of dangerous lending and investing that brought the US economy to its knees.
The Senate is slated to take an initial procedural vote this week to move the measure forward, and if it eventually becomes law, it would be the most substantial weakening of Dodd-Frank since it was passed.
“On the 10th anniversary of an enormous financial crash, Congress should not be passing laws to roll back regulations on Wall Street banks,” Sen. Elizabeth Warren (D-Mass.) said in an interview. “The bill permits about 25 of the 40 largest banks in America to escape heightened scrutiny and to be regulated as if they were tiny little community banks that could have no impact on the economy.”
Sen. Jon Tester (D-Mont.), a Banking Committee member and one of the new bill’s leading Democratic supporters, said banks in his largely rural state have been going out of business in part because of the regulations imposed by Dodd-Frank.
“The Main Street banks, community banks and credit unions didn’t create the crisis in 2008, and they were getting heavily regulated,” Tester said, contending that “there’s not one thing in this bill that gives Wall Street a break.”
Critics dispute those claims, echoing a Democratic Party schism over financial regulations that pits liberals such as Warren and top Banking Committee Democrat Sherrod Brown (D-Ohio) against moderate-leaning Democrats including Tester and Sens. Heidi Heitkamp (N.D.) and Joe Donnelly (Ind.).
Many of the moderates face political pressure to establish a centrist voting record, particularly after voting against the GOP tax cuts in December. Tester, Heitkamp and Donnelly are all up for reelection in November in states President Trump won by large margins. All three helped negotiate the banking legislation with its GOP sponsor, Banking Committee Chairman Mike Crapo (R-Idaho).
Yet the coalition of Democrats supporting the bill also includes lawmakers such as Tim Kaine (Va.), Hillary Clinton’s running mate in the 2016 election, and Mark R. Warner (Va.), who was among the lead authors of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act but also voiced concerns about over-regulating smaller banks.
The GOP-led bill appears to have a clear path to becoming law. The level of Democratic support all but guarantees that the bill will have the 60 votes needed to pass the Senate, which will move toward debate on the legislation with a procedural vote set for Tuesday. And the Trump administration has been broadly supportive.
The House has already passed legislation that would repeal larger chunks of Dodd-Frank, so proponents’ biggest remaining challenge may be to reconcile the House and Senate versions. Senate Democrats backing their version say they’ll resist any significant changes.
Senate Minority Leader Charles E. Schumer (D-N.Y.), who represents Wall Street and is often motivated by the desire to protect his vulnerable red-state incumbents, opposes the bill, but he has taken a largely hands-off approach to the debate thus far.
That a Wall Street regulatory rollback is possible is a testament to the financial sector’s improved standing on Capitol Hill — as well as to the lobbying muscle of local banks and credit unions present in every state.
Financial firms upped their campaign contributions to key Senate Democrats over the last year, with Heitkamp, Donnelly and Tester becoming the top three Senate recipients of donations from commercial banks so far in the 2018 campaign cycle , according to the Center for Responsive Politics. The senators disputed any connection between the donations and their support for the Dodd-Frank rewrite legislation.
Lobbying efforts ramped up as the Senate debate approached. The Credit Union National Association descended on Washington in late February to meet with lawmakers. More than 5,000 credit union advocates, including employees and chief executives from every state, arrived on Capitol Hill wearing “vote yes” pins and stickers. They held 600 meetings with lawmakers.
The in-person push started with a White House meeting with Trump and Gary Cohn, the director of the National Economic Council, during which credit union advocates pitched the bill as a way to rectify Dodd-Frank’s overreach. “We understand the concerns that banks perpetuated the crash, but those were not credit unions,” said Jim Nussle, president of the Credit Union National Association, who attended the meeting.
Small and regional banks have complained that Dodd-Frank has put them under an unfair supervisory squeeze, punishing them for the sins of Wall Street. Many lawmakers from both parties have proved sympathetic to these claims, helping fuel bipartisan backing for Crapo’s bill.
While the bill’s effects on the financial sector would only become fully clear after passage, the legislation aims to strike a middle ground between those seeking to gut Dodd-Frank and those who want the law left intact — or, at most, to be modified by tweaks and technical corrections.
The new measure centers on an exemption for some two dozen financial companies from stricter supervision by the Federal Reserve. It would lift the asset limit for this scrutiny from $50 billion to $250 billion, easing — at least temporarily — scrutiny on banks such as SunTrust and BB&T. Fewer than 10 U.S. banks have more than $250 billion in assets, although the Fed would reserve the right to apply tougher scrutiny to a smaller bank if it felt this was justified.
Critics charge that advocates of deregulation are guilty of overly short memories and a false sense of security. There has not been a banking crisis since the Dodd-Frank law — named for its sponsors, former senator Chris Dodd (D-Conn.) and former congressman Barney Frank (D-Mass.) — passed a Democratic-controlled Congress in 2010 on nearly party-line votes and was signed by Obama.
The law was a response to the 2008 financial crisis that felled hundreds of banks and large financial companies, nearly toppling some of the largest U.S. financial institutions, including Bank of America and Goldman Sachs. The Bush administration was forced to seek a $700 billion rescue package that stabilized the economy by keeping some of the largest firms afloat.
The Washington Post
