A ‘Goldilocks' Dodd-Frank Change

The U.S. House and Senate have now passed a bill (S. 2155) that would make changes in the Dodd-Frank Act. Although the bill already has prompted both high praise and intense criticism, the actual changes reflect a moderate approach. The changes are significant, especially in reducing regulations on small and medium-sized banks, but do not represent a sea change for the industry as a whole. President Trump signed the bill into law on May 24.

Nearly eight years after its original passage, Congress agreed this week to relax key elements of Dodd-Frank, the financial regulatory legislation crafted in the wake of the global financial crisis. The bipartisan legislation, drafted by Senate Banking Chair Mike Crapo (R-ID) and Sen. Jon Tester (D-MT), passed the Senate in March and the House on May 22. While S.2155 eases some financial institution regulations, members of both parties admit that the legislation does not “gut Dodd-Frank,” a key campaign goal of many Republicans. House Financial Services Chair Jeb Hensarling (R-TX) had pushed through the House in 2017 the Financial CHOICE Act, which repealed more financial regulations but received no Democratic support and was never taken up by the Senate. Many Senate and House Democrats still opposed S. 2155 as unnecessary, while Republicans argued the bill will provide growth and necessary relief for smaller institutions.

What’s in the Bill?

S. 2155 focuses on five key areas: mortgage lending, small and community banks, larger financial institutions, securities markets, and consumer protections. The most notable change for larger financial institutions is the alteration in the asset threshold for automatic “systemically important” designations which bring increased regulatory requirements. The legislation lifts the threshold from $50 billion in assets to $250 billion, a compromise from previous legislation that aimed to remove the minimum threshold altogether. The change will exempt more than half of the approximately 40 U.S. bank holding companies (BHCs) currently under automatic designation. (The lifting of the threshold is immediate for banks under $100 billion in assets. The Federal Reserve Board has discretion, under the bill, to further raise the threshold to $250 billion in assets.) Smaller BHCs — those with $10 billion or less in assets — will now be exempt from Dodd-Frank’s controversial Volcker Rule, as long as no more than five percent of the bank’s consolidated assets come from trading assets and liabilities. Many Republicans had pushed for a full repeal of Volcker, but compromised to achieve the necessary Democratic support. Smaller institutions could also receive relaxed capital and data sharing requirements — elements that supporters believe to be too strict for institutions of their size. Notably, the bill does not include alterations to the Consumer Financial Protection Bureau (CFPB), an elimination of Orderly Liquidation Authority (Title II), or removal of regulators’ ability to designate nonbank financial institutions as systemically important.

Regulatory Burdens Eased, CFPB Remains

The most significant change in S. 2155 is the easing of regulation of certain BHCs. The increase in the asset threshold for automatic systemic designations by federal financial regulators means a lighter regulatory burden for such midsized banks. This could stimulate more acquisitions of smaller BHCs by BHCs in the $50 billion to $200 billion asset size range. Similarly, by exempting BHCs and savings and loan holding companies with $10 billion or less in assets from the Volcker Rule (as long as these institutions meet the “no more than five percent of consolidated assets trading assets and liabilities” standard), the bill may encourage these institutions to engage in trading for their own account, an activity viewed by some as more risky than more basic banking activities. The relaxed capital standards should allow institutions that benefit from them to increase lending, which may further aid economic growth.

By not taking any action against the CFPB and instituting several new consumer protections, Congress did not change the structural aspects of the CFPB (such as its single director-removable only for cause leadership framework and dedicated funding structure) that have vexed many Republicans. Moreover, the protection of student borrowers or their cosigners (often parents) from automatic default in the event of the bankruptcy or death of the borrower, and the release of the cosigner upon the death of the borrower, offer some welcome relief under the federal student loan program.

What’s Next?

Enactment of S. 2155 means the vast majority of the Dodd-Frank Act is settled law for the foreseeable future. Calls for repeal of Dodd-Frank represented political posturing more than realistic policymaking. In addition, more significant reforms — dismantling the CFPB, repealing Title II Orderly Liquidation Authority, or eliminating systemic institution designations — are no longer politically viable now that most community banks and credit unions are out of the advocacy equation. However, attempts at more targeted changes will continue, with some potential for success if it’s a bipartisan effort, for the remainder of the year and into the next Congress.