The Senate on Wednesday passed a bill that would roll back parts of Dodd-Frank. The vote was 67–31, with 17 members of the Democratic caucus breaking party lines. If the legislation passes the House and is signed, it will be the largest change to the controversial financial-reform package since it became law in 2010.
A major focus of the reform, the Economic Growth, Regulatory Relief, and Consumer Protection Act, is correcting the unintended harm Dodd-Frank has caused to smaller banks around the country. Dodd-Frank imposed 28,000 new restrictions on banking activities, and larger banks proved more capable of complying with them.
Credit unions and local banks have been disappearing under the pressure, at a rate, according to government figures, of one per day since Dodd-Frank. This has led to a consolidation of the industry, eliminating competition and ultimately boosting the big banks all the more. Consumers may have been victims as well: Three-quarters of banks offered customers free checking with no minimum balance in 2009, a number that had been rising for decades; by 2012 it was below 40 percent, where it remained last year.
Supporting Dodd-Frank has become something of a Democratic responsibility: The legislation was a victory of the Obama administration, it’s a major boot on the throat of Wall Street, and it created Elizabeth Warren’s lapdog, the Consumer Financial Protection Bureau. So the victory in the Senate is a sign that moderate Democrats are beginning to side with conservatives who see Dodd-Frank as anti–Main Street as much as it’s anti–Wall Street.
From the Senate floor to radio interviews, Democrats from Jon Tester (D., Mon.) to Gary Peters (D., Mich.) pointed to banks in their states hurt by the law and pledged to relieve the pressure. Even blue-state senator and former Clinton vice-presidential pick Tim Kaine (D., Va.) voted for the reform. While critics of the bill are claiming the moderate Democrats’ votes came from reelection fears, rather than genuine concern about economic harm, the numbers don’t back them up: Just seven of the Democratic “yes” votes were from senators running for reelection in Trump-won states, and three red-state senators facing reelection voted “no.”
The reform focuses on community banks, which Dodd-Frank defines as those with less than $10 billion in assets. (“Big” banks have more than $250 billion in assets; mid-size banks fall in between.)
Lenders making 500 or fewer mortgages a year will now be exempt from mortgage-data reporting requirements. Critics of the bill claim it will allow such banks to discriminate against black or Hispanic borrowers; supporters retort that the rules are too costly to comply with, and that the reporting requirements are unlikely to cause a significant decrease in lending discrimination. The bill also exempts community banks from the Volcker rule, which prohibits commercial banks from engaging in certain types of proprietary trading — swapping their funds for profit — and restricts hedge-fund and private-equity investment.
The most controversial part of the reform, though, is its redefinition of “too big to fail” (or “systemically important”) banks, which at present include institutions above $50 billion in assets. Dodd-Frank requires these institutions to have higher capital cushions and undergo “stress tests,” both ways of verifying that a bank can survive a sudden shock or absorb a certain amount of defaulted debt, and a “living will,” a plan explaining how to “wind down” the bank in the event it fails.
The reform raises the threshold to $250 billion, freeing regional banks such as Fifth-Third and SunTrust. Critics say this ignores the fact that banks collapse together — so the smaller banks should have some verification of survivability too — while advocates have pointed out that Dodd-Frank was conceived with the mega-banks in mind, not the smaller ones caught up in the shockwaves.
Overall, the reform is not a dramatic walk-back.
Overall, the reform is not a dramatic walk-back. In an interview with Vice News, Barney Frank — a former congressman from Massachusetts and a co-author of the bill — pointed out that 95 percent of the original law is unaffected. While the typical anti–Wall Street progressives such as Elizabeth Warren (D., Mass.) and Bernie Sanders (I., Ver.) have criticized the reform effort as giving too much to Wall Street, Dodd-Frank was designed to protect the American economy from a very specific thing: bank failure. Resisting these changes from the platform of “down with Wall Street” is to forget why Dodd-Frank exists and impose on it a new purpose.
The bill now faces the House, where it’s likely to receive numerous changes. The House passed its own bill in June, the Financial CHOICE Act, but the legislation failed to leave committee in the Senate. The House’s bill is much more severe than the Senate’s and includes provisions that moderate Democrats are unlikely to support.
Hopefully the House can settle for a milder, but still effective, reform that Senate Democrats can endorse. Dodd-Frank is a deeply flawed law, and the Senate’s rollback is a good step forward.