During this week’s House hearings on financial regulation, the partisan divide seemed as wide as ever on the costs and benefits of financial reform. But, beneath this high-profile political positioning, consensus is growing beneath the surface for a targeted change that would unite Democrats and Republicans: sweeping Dodd-Frank relief for community banks. The only dividing point is how to define community banks – FinServ Democrats suggested that this threshold should be set for banks with assets below $1 billion; GOP members and some senators countered with a $10 billion threshold. Both sides of the aisle agreed that, whatever the size of relieved community banks, big banks were doing far too well under current rules and thus warranted no such sweeping change. Shazam – a $5 billion ceiling for community-bank relief is born, leaving for another day the broader questions of Dodd-Frank revisions with macro impact. As this behind-the-scenes scenario takes shape, here’s what to watch.
First although the House can send pretty much anything Republicans want to the Senate, legislative life in the Senate largely depends on the little consensus still in evidence on that side of the Capitol. Senate Banking Chairman Crapo thus has made it clear he plans to tread a consensus-built path to the floor. His problem: will other Senate Republicans agree with this go-slow approach?
Sen. Toomey (R-PA) yesterday reiterated his desire to make the CFPB and OLA disappear through the reconciliation process. Chairman Crapo in contrast said that he is thinking about financial reform early in 2018, showing no sign of weakening his opposition to doing anything out of regular order. If the Crapo strategy is bypassed by leadership – and we don’t think it will be unless the House throws some Dodd-Frank reforms into reconciliation – then consensus is over on anything having to do with financial reform because Democrats will feel ill-used by this hard-hitting floor tactic. If, though, Sen. Crapo stays in charge, then the community-bank bill could well advance.
Assuming the Senate gets this far, the next challenge comes from links between simple, sweeping community-bank reform on which squabbling is limited only to the asset-size threshold to all the other issues on the GOP reform to-do list. There had been bipartisan support for expansive regional-bank relief that eliminates systemic asset triggers or raises them to $250 billion or even Sen. Shelby’s $500 billion escape hatch. I could see some form of regional-bank relief appended to a community-bank bill, but only if this advances in isolation from pretty much everything else Republicans in the House want to do to Dodd-Frank. Eviscerating the CFPB through the reconciliation process could take one toxic issue off the table, but it’s far too early to tell if this would clear the way for regional-bank relief or only poison the waters in still more lethal fashion.
The final major reform threads are to be pulled by the Trump Administration. The first of these will be its nominations to key financial posts. If these are relatively non-controversial (as some possible nominees could prove), then political capital will not be expended on this cause; if in contrast confirmation battles are caustic, then they will be costly in terms of future consensus that will damage the prospects even for easy bills such as community-bank relief unless any such bill is paired with something Democrats somehow could come to love.
The second thread with legislative impact is what will be proposed in early June in compliance with the President’s executive order. Ring-fencing along the FHC-heavy lines we outlined a couple of weeks ago could advance largely through the regulatory process, leaving Congress only to ratify this approach and make changes supported by all but a few big banks in concert with community-bank relief.
If, though, the Treasury plan touches Dodd-Frank third rails – the CFPB most electric among them – then all negotiating bets are off. And, if the Trump Administration not only proposes to electrocute Dodd-Frank provisions that Democrats hold near and dear and also means what it says, this will expend costly political capital in another high-profile, base-cementing battle likely to result in nothing but more blood on the political floor, blood spilled by community banks along with the rest of the financial-services industry.
At the end of this very long, hard, and often-gruesome process, community-bank relief could rise again – as is already clear, everyone on Capitol Hill wants it. The tricky bit will not be setting the asset-size threshold or even essentially carving community banks out of Dodd-Frank. The really hard parts come from the overall process in Congress – already breaking down – and all the other financial-reform initiatives in which community-bank relief could quickly be ensnared.