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A bipartisan bill which would relax restrictions placed on the financial industry during the credit-crisis has cleared the Senate with a vote of 67-31, on the 10-year anniversary of the collapse of Bear Stearns - but not before several changes to the original legislation were made, which would benefit big banks. 

Sen. Mike Crapo (R-ID), chairman of the Senate Banking Committee

"A bill that began as a well-intentioned effort to satisfy some perhaps legitimate community bank grievances has instead mushroomed, sparking fears that Washington is paving the way for the next financial meltdown," writes David Dayen of The Intercept.

Key Provisions

  • Relaxes a host of reporting requirements for small - medium banks, and to a smaller extent, large banks
  • Eliminates a reporting requirement introduced by Dodd-Frank designed to avoid discriminatory lending
  • Relaxes stress testing requirements intended to show how banks would survive another financial crisis
  • Raises the threshold for banks which are not subject to enhanced liquidity requirements, stress tests, and enhanced risk management, from $50 billion to $250 billion - exempting several institutions which could pose systemic risks down the road.
  • Allows megabanks such as Citi to count municipal bonds as "highly liquid assets" that could be used towards the "liquidity coverage ratio," - assets which can be quickly liquidated during a crisis. 
  • Calls for a report on the risks and benefits of algorithmic trading within 18 months

Introduced by Idaho Republican Mike Crapo and co-authored by North Dakota Democrat Heidi Heitkamp and several other Democrats, S.2155 was originally intended to relax regulations on community banks, credit unions, and so-called custodial banks - institutions which do not primarily make loans, but instead keep assets safe. In addition to relaxed reporting and disclosure requirements, the bill reduced the supplementary leverage ratio (SLR) - or how much equity they must have on hand compared to total assets (such as loans). As it was first written, the SLR modification would have benefitted just two U.S. banks; State Street and Bank of New York Mellon. 

After a vociferous protest by Citigroup CFO John Gerspach, among others, the language in the bill was vastly changed - along with the definition of a custodial bank so as to include virtually any large financial institution, such as Citigroup. 

Citi is making a very aggressive effort,” according to one bank lobbyist who asked The Intercept not to be named because he’s working on the bill. “It’s a game changer and that’s why they’re pushing hard.”

Aside from the gifts to Citigroup and other big banks, the bill undermines fair lending rules that work to counter racial discrimination and rolls back regulation and oversight on large regional banks that aren’t big enough to be global names, but have enough cash to get a stadium named after themselves. In the name of mild relief for community banks, these institutions — which have been christened “stadium banks” by congressional staff opposing the legislation — are punching a gaping hole through Wall Street reform. Twenty-five of the 38 biggest domestic banks in the country, and globally significant foreign banks that have engaged in rampant misconduct, would get freed from enhanced supervision. -The Intercept

“Community banks are the human shields for the giant banks to get the deregulation they want,” said an angry Senator Elizabeth Warren (D-MA) who has donned her war paint for an ill-fated fight against the legislation. “The Citigroup carve-out is one more example of how in Washington, money talks and Congress listens.”

Relaxed reporting, relaxed leverage ratios, relaxed disclosures

One of the biggest giveaways is relaxed reporting requirements. Currently, banks with over $50 billion are subject to enhanced regulatory standards introduced by Dodd-Frank - which include additional capital and liquidity requirements, stress tests, and enhanced risk management. The new bill raises that threshold to $100 billion immediately, and to $250 billion in another 18 months. 

This would primarily benefit so-called "stadium banks," as explained by a Senate aide: "If you can get naming rights to a stadium, you're not a community banks." 

The relaxed rules would benefit 25 of the 38 largest banks in the United States, including Citizens Bank (Philadelphia Phillies), Comerica (Detroit Tigers), M&T Bank (Baltimore Ravens), SunTrust (Atlanta Braves), KeyBank (Buffalo Sabres), BB&T (Wake Forest University), Regions Bank (AA baseball’s Birmingham Barons), and Zions Bank (Salt Lake City’s Real Monarchs of Major League Soccer).

While smaller banks don't pose much systemic risk in the event of another banking crisis - banks in the $250 billion range may be a different story.

“The last crisis proved that three banks in the $100 to $250 [billion] range were shown to be systemic, because regulators had to arrange a quick emergency bailout or sale,” said George Washington University law professor, Arthur Wilmarth. 

National City was a $145-billion bank and a major subprime originator when it failed and was sold to PNC. The financing arm of General Motors, GMAC, had $210 billion in assets when it received $17.2 billion in bailout money and another $7.4 billion in guarantees after crumbling under the weight of bad loans. And Countrywide, once America’s biggest subprime lender, had $200 billion in assets when it was sold under duress to Bank of America. Going back further, if you adjusted Continental Illinois’ size for inflation when it received a federal bailout in 1984, it would fall in the $100 to $250 billion range. -The Intercept

That said, the Fed will still have the discretion to regulate systemically risky banks. 

Title II of S.2155 also allows banks with under $10 billion in assets to avoid several reporting requirements, along with the Volcker rule's restriction on market trading with their own deposits - as long as their simple leverage ratio is between 8 and 10 percent.

This may benefit community banks at the expense of consumers, as it allows the smaller lenders to issue high-risk loans without various disclosures and "ability-to-pay" rules across the country, as long as the loans are maintained within the bank's portfolio. 

The theory is that small banks with “skin in the game” won’t take imprudent risks. “I’ve got an S&L crisis that says otherwise,” wrote Georgetown Law professor and former CFPB adviser Adam Levitin in a blog post. He believes the provision will encourage community banks to load up on high-cost, toxic loans, setting them up to fail if economic conditions shift. -The Intercept

Other relaxed regulations include not requiring appraisals in rural areas and eliminating escrow account requirements. “You can tell they’re not technical fixes because they all push against consumers,” said Mike Konczal of the Roosevelt Institute.

Discriminatory lending?

Critics of the bill have pointed to section 104, which exempts banks and credit unions which make fewer than 500 loans per year from the Home Mortgage Disclosure Act (HMDA) - which requires that lenders report credit scores, debt-to-income ratios, LTV ratios and other information in order to ensure that banks are not engaging in discriminatory lending practices. This would affect around 85% of all banks and credit unions. 

“HMDA data is a crucial tool to make sure every American has access to opportunity,” said California congressional candidate and mortgage industry expert Katie Porter. “Discrimination in lending has an ugly history in the U.S. This would make the data unreliable.” And the data are the building blocks of any lending discrimination case; you can’t enforce fair housing laws without the facts.

Critics fear that S.2155 would enable smaller banks to overcharge black and Latino borrowers, or deny them financing altogether. 

According to the Center for Responsible Lending, blacks and Latinos had the highest rate of foreclosures per 10,000 loans to owner-occupants originated between 2005-2008.

responsiblelending.org

In response to the controversial provision, Sen. Tim Kaine (D-VA), offered an amendment to kill the HMDA reporting requirements - however when asked about it he admitted: “I don’t need my amendment to pass” to support the underlying bill. “I think the bill is solid as it is.”

The bill now moves to the House, where Republicans have been pushing a more aggressive rollback of financial regulations enacted during the credit crisis. 

Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, has said that House Republicans will want to alter the Senate bill to reflect their priorities. But that could drive away the Senate Democrats needed to pass the legislation, and so the House will face significant pressure to accept the Senate legislation with few, if any, changes. -WaPo

Recall that nearly 20 years ago Congress and Bill Clinton repealed Glass Steagall - which allowed banks to take on massive risks, shortly before Barney Frank pushed banks to extend subprime and "liar" loans to under-qualified applicants, which were then packaged into AAA paper and leveraged into oblivion. 

And once again, history repeats itself...