BOISE — A vote is expected next week on a sweeping bill crafted by Sen. Mike Crapo, legislation that would overhaul financial regulations created after the 2008 financial crisis.
The bill has rare marks of bipartisanship during a period of intense party division in Washington, and it could mean lighter regulatory burdens for mid-sized regional banks and small community banks. But analysis from the nonpartisan Congressional Budget Office suggests it could also increase the risk of future bank failures and bailouts.
Crapo was appointed chairman of the Senate Banking Committee last year. He has led the committee to craft the bill through the normal legislative process, garnering 12 Republican and 12 Democratic cosponsors, along with one independent.
“We have negotiated under two different administrations and several leaderships of the banking committee and developed very high levels of trust among one another,” Crapo said.
The legislation constitutes the most sweeping deregulatory move for the U.S. banking system since the 2008 financial crisis and the Dodd-Frank banking regulations that were passed soon after. The bill leaves much of the Dodd-Frank regulatory framework intact while removing heightened regulations from regional banks, along with a number of other changes.
Unlike a more sweeping deregulatory bill in the U.S. House, Crapo’s bill appears ready to move through the Senate. The large number of Democratic cosponsors means Minority Leader Chuck Schumer, D-N.Y., is unlikely to be able to block it with procedural maneuvers. Majority Leader Mitch McConnell, R-Ky., has filed a motion for cloture, the first step in overcoming the filibuster.
Dodd-Frank put particular emphasis on increasing regulations on banks that are “too big to fail,” those whose failure could endanger the overall financial system as the failure of Lehman Brothers did during the 2008 financial crisis. It designated such banks as “systemically important financial intuitions.”
And the authors of Dodd-Frank defined such institutions as those with at least $50 billion in consolidated assets. Coming in above that threshold meant being subject to so-called “enhanced prudential standards.” These include measures such as enhanced capital requirements, leverage limits and regular stress testing.
Fifty billion in assets might sound like a lot of money, but in the banking world it’s small potatoes. According to the latest Federal Reserve statistics, for example, JP Morgan Chase has about $1.6 trillion in domestic assets.
Most Idaho banks already fall well below the $50 billion cut-off. For example, the Bank of Commerce has about $1 billion in assets, while the Bank of Idaho has about $320 million.
The regulatory relief would come primarily to relatively large regional banks such as Zion’s Bank, which has about $65 billion in total assets, putting it just above the cut-off for Dodd-Frank’s heightened regulations for banks whose failure could endanger the overall financial system.
Particularly for banks on the smaller end of the systemically important financial intuition spectrum such as Zion’s, the large number of compliance officers they must hire and additional work they must perform can be burdensome. While JP Morgan Chase is more than 300 times its size, Zions is subject to the same suite of regulations as Wall Street’s biggest banks.
Former Rep. Barney Frank, D-Mass., told a banking trade journal in 2016 that he thought they had made a “mistake” by pegging the cut-off at $50 billion. He suggested it should be moved up to $125 — more than double the original threshold but half the level in Crapo’s bill.
On the Senate floor Thursday, Crapo also pointed out that the bill still allows the Federal Reserve to dip below the $250 billion cap and impose regulations in cases where it deems a regional bank could pose a risk to the health of the financial system.
Crapo and others on the banking committee also have been responsive as outside criticisms have been raised. For example, some detractors charged that certain large foreign banks, from Germany’s massive Deutsche Bank to Swiss giant HSBC, have nearly all of their assets overseas, so they fall under the $50 billion cap. Crapo said in an interview that the charges were unfounded, but he introduced an amendment that assures overseas assets can be taken into account when the Fed decides whether to regulate a bank as a systemically important financial intuition.
Crapo said he considers deregulation of certain parts of small banks’ — those with less than $10 billion in assets — mortgage lending practices to be the most important part of the bill. Crapo noted many such banks have curtailed or shut down their mortgage lending arms due to regulatory compliance costs.
“The paperwork involved in complying with all the regulations in that arena is just phenomenal,” he said.
Crapo predicted that the loosened regulations will free up capital, allowing more mortgage origination and business lending throughout the county. He also said he doesn’t think the bill will increase risks in the banking system.
The CBO found that lowering the threshold would increase the likelihood of bank failures for banks with between $100 billion and $250 billion in assets, and estimated the increased failure rate would result in more liabilities for federal bank deposit insurance. But it found those failures would likely result in only $28 million in extra deposit insurance claims over the next decade, a tiny figure relative the size of the banking system.
Reporter Bryan Clark can be reached at 208-542-6751.