I write this in anticipation of the debate on the Senate Banking Committee bill to amend Dodd-Frank, which is expected to begin next week.
The history behind this current debate begins with the Republican takeover of Congress in 2010. Having just passed by the narrowest possible margin a comprehensive law covering most aspects of financial regulation, my colleagues and I expected over the next few years to begin the process of fixing things we hadn't been able to reach or might, based on experience, wish to reconsider.
While some relevant issues emerged as early as 2012, just as I retired from Congress, it wasn't until President Obama's reelection that we could be sure that the law would survive, and there was no point in trying to fine tune a plane that might have been headed for the scrap heap. So, 2013 was the first year in which it made sense to consider how a very good law could be made better.
In the spring of 2013 Federal Reserve governor Dan Tarullo, the de facto Fed Vice-Chairman for Regulation, proposed the two changes in the law that are the most salient aspects of the bill now pending in the Senate. He urged exempting banks with less than ten billion in assets from the Volcker Rule, and raising the level of assets which put a bank under the jurisdiction of the Financial Stability Oversight Council above $50 billion.
Then newly retired, I attended the conference in Chicago at which he made the speech and publicly expressed my agreement on both points. I did so based on the combination of political and substantive considerations which have formed the basis of my views on the issue ever since.
Substantively, I believed that we had made a mistake in one case and that in the other, experience argued for changing a decision that had been reasonable on the merits when we made it. The mistake was the $50 billion limit.
I knew that it had not been carefully considered, given the pressure to make so many decisions, and that letting these banks grow unhindered to $100 billion could in fact provide a more competitive environment, lessening, even marginally, the foundation of the mega banks.
We had not formally exempted smaller banks from the restriction on self-trading in derivatives, not because we wanted to ban that activity, but because we did not think it was happening. What I learned was that even though few if any of the small banks were affected by the law, they were getting legal advice to act as if they were and were spending scarce time and money to show that they were in compliance.
Freeing them from that burden was not only a good idea substantively, it offered the opportunity to remove one of the major sources of the political attack on the law with no sacrifice of its substance. While the law was and still is generally popular, the community banks, situated as they are in every member's district, and enjoying a much more favorable reputation than their much bigger brother and sister institutions, generated the only criticism of financial reform that legitimately worried members, particularly of course those who had voted for it.
Had those of us who supported reform still controlled Congress, we could have adopted these two changes, thereby greatly strengthening the political potion of both the bill and those members particularly from marginal districts who had voted for it. But for precisely that reason, the zealous ideological enemies of regulation who controlled the House Committee on Financial Services were determined to allow no such alleviation of the pressure. To them, what we saw as flaws that could be fixed at no cost to our goals were weapons to be wielded against those goals.
It was at this point that I began conversations with my former colleagues about the desirability of supporters of the law putting forward a carefully drawn bill embodying these two amendments. And I stress that these efforts began well before I had even heard of Signature Bank, the institution on whose board I have served since mid-2015, and which would benefit from raising the $50 billion limit.
And it was at this point that my disagreement with some of my strongest allies on this issue arose. For reasons they can best offer, some of the leading voices for financial reform in Congress and among advocacy groups disagreed with me and declined to take the initiative I favored. In my view, we would have been much better off if the strongest Democratic supporters of reform united behind the bill I have described, offering their colleagues from tougher districts the chance to demonstrate to their community bankers their support for their legitimate concerns.
Where I did find agreement, understandably, was from Democrats from districts where the vocal opposition of the small banks in their states or districts could be damaging. It is important to note here that in every case these were Members who if they were in office in 2009 and 2010 had supported the passage of the law.
That is, they were being confronted by angry constituents' from community banks who blamed their votes for the problems they claimed to be facing, and it seemed to me then and now simple political and substantive sense to give the chance to respond to that anger without weakening the law in any significant way.
After the 2014 elections left the Republicans in control, these efforts intensified, especially in the senate where the 60-vote requirement gave Democrats some bargaining power. In the House, by contrast the anti-reform majority was able to pass a bill that effectively repealed the entire law, with the vocal support of the small and midsized banks overshadowing the fact that it was killing consumer protection and rolling back other popular reforms.
By 2016, the bloc of pro-financial reform Senate Democrats with whom I agreed that a bill dealing with the small and midsized banks would be both substantively neutral and politically beneficial, both to themselves and to the basic cause of financial reform, were negotiating for this package.
One new substantive element emerged - relaxing the strict rules against mortgage loans to borrowers with weaker credit ratings by banks with less than $10 billion in assets as long as the loans were to be kept in the bank's portfolio for several years and not immediately securitized. Obama Administration officials were party to these talks and were willing to recommend to the president that he sign a bill that accommodated the smaller banks and raised the FSOC floor to $125 billion.
But this is where the continuing Republican control of the Senate created the dilemma we now face. The Senate Banking Committee Republicans were willing to break with their House counterparts and work on a bill that left most of Dodd-Frank in place, but their price for such a package was higher than many of us had hoped it would be.
Specifically, they insisted on raising the FSOC level to $250 billion, a level twice as high as is prudent. As I have noted before, the failure of two or three such institutions would put us in Lehman Brothers territory. They then exacerbated that problem by putting in place rules that will make it excessively difficult for any future regulators to invoke what has from the outset been an important Democratic argument—namely that there be a right for the FSOC to take jurisdiction over banks between $100 and $250 billion if that bank's activity threatened stability.
The Republicans also added a provision allowing foreign megabanks—Deutshce Bank and HSBC for example—to evade regulation appropriate for banks of their size by putting their American assets in a separate, holding company. Finally, the package continues to include a provision, weakening the law against racial-discrimination in housing, by raising from 50 to 500 the number of loans a bank may make before reporting on this issue.
While I share the view of many of the pro-reform Senate Democrats who have accepted this package that responding to the concerns of small and midsized banks has both substantive and political arguments in its favor, I believe that the price the Republican colleagues are demanding is too high.
I'm especially troubled by the insertion into the rules governing the FSOC's assertion of authority over banks in the $100 to $250 billion range requirements that approximate the kind of rigid cost benefit analysis that are nearly impossible to satisfy when the benefit is the avoidance of a threat to financial stability.
If I were still a member of Congress, I would vote no on this package without amendments fully restoring the law regarding housing discrimination, reducing the FSOC level to $125 billion, and eliminating both the restrictions on the FSOC's power to reach down and the specials rules for foreign mega-banks.
I understand why the Democrats who support the package believe that its positive elements outweigh these negatives, and I agree that one of the most important positives is that passing the Senate package into law is in effect a ratification of all the other parts of the law. But I disagree based in part on what is in the bill, and by two factors outside the parameters of the amendments.
One is the ability of President Trump's appointees to employ the parts of the amendments I find problematic in the way most damaging to reform. The other is the stated intention of the House Committee leaders to press the Senate into accepting some of their anti-reform proposals. I am encouraged that the Democrats who sponsor the amendments have said that they will resist such effort, but I understand why this makes many of the most pro-reform elements nervous.
While I do agree with those with whom I have been allied in this effort that the bill should not pass as written, some disagreements remain.
I regret the unwillingness of some of reform's strongest defenders to join in the effort to propose a pro-reform Democratic bill three years ago reflecting the position outlined by Dan Tarullo in 2013. While this would not have stopped Republicans from seeking more, it would have better positioned Democrats from marginal seats to resist.
I most strongly disagree with advocates who in this case as in others treat a fairly narrow dispute over one issue as if it were a betrayal of basic principles. If Senators from states that voted for Donald Trump who have voted against his tax cut, for the preservation of the Affordable Care Act, and in this case for protection of most of the Dodd-Frank Act are treated as enemies, we progressives too few friends to be effective.
Commentary by Barney Frank, chair of the House Financial-Services Committee from 2007 to 2011, during which time Congress enacted the TARP program and the financial-reform bill known as Dodd-Frank. Follow him on Twitter@BarneyFrank.
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