AFTER 25 hearings, thousands of pages of comments and many unworkable bipartisan working groups, America’s Senate has finally produced a possible consensus bill to tweak the Dodd-Frank Act, the vast swathe of banking regulation passed soon after the 2008-09 financial crisis. On March 6th, in a technical move that counts as significant progress in Washington’s creaky bureaucracy, 16 Democrats and one independent joined Republicans in voting to allow several hours of debate before passing the bill on to the Senate leadership.
Amendments may yet be added and the entire edifice could fracture, but the vote, after years of effort, suggests a bill might now pass. If it does, it would then have to be reconciled with a different bill passed by the House of Representatives. But this now seems possible as well, if only because the alternative would be no amendment to Dodd-Frank at all.
One certainty is that, whatever the bill’s fate, there will be disappointment. Bernie Sanders, a socialist who ran for the Democratic Party’s presidential nomination, said passage would create massive economic disruption. Elizabeth Warren, a Democratic senator since 2012 who helped ensure the current law’s expansive scope, said the proposal was a “punch in the gut to American consumers”, and “bank lobbyists …dragging us back to the bad old days”.
Dodd-Frank was passed in 2010 with almost no non-Democratic support and has been the subject of rancour ever since. That is not only because of the partisan nature of its passage, but also because of its scope, which even supporters would admit went far beyond any cause of the financial crisis. Its original 2,300 pages have spawned tens of thousands more of rules. Compliance costs have run to billions of dollars. Not only Republicans but also many Democrats agree there have been harmful unintended consequences. Hence the willingness of some to support a rewrite.
At first Republicans promised to rescind Dodd-Frank in its entirety. But more recently, as part of a broader acceptance of political realities, they have focused on what they call “recalibrating”, that is, tweaking regulations they disapprove of rather than tearing them up. Changes to Dodd-Frank with no domestic constituency to lobby for them, such as to rules on foreign banks which their executives consider deeply unfair, have fallen by the wayside. But also left intact are many parts that have attracted fierce domestic opposition.
Two institutions much hated by the industry will be spared: the Consumer Financial Protection Bureau and the Financial Stability Oversight Council. Both have reassuring names, novel structures and complex mandates that give a few political appointees sweeping authority over financial institutions. Missing too in the Senate bill is a provision in the House bill that would have freed banks from the most bureaucratic regulatory measures if they held extra capital. Adding provisions relating to any of these areas could have cost essential Democratic support.
The most significant of the Senate’s proposals is to raise the threshold that triggers closer regulatory scrutiny from $50bn in assets to $250bn. Currently banks with just over $50bn come under much the same regime as those with trillions, even though larger institutions tend to have more varied business and thus merit more scrutiny. The proposal would also greatly reduce regulatory requirements for small institutions with straightforward operations. During the debate, senators recounted complaints from constituents about the way in which rules that were intended to rein in vast financial institutions ended up wounding small local banks, with the competitive benefits flowing to the giants.
The Senate bill contains many other provisions, some of which are bound to have new unforeseen consequences. It runs to 148 pages, more than enough room for mischief. But it reveals much about the way laws are made in Washington that it is one of the shortest pieces of major financial regulation in a decade, says one lawyer with expertise in the area. Notwithstanding the many compromises and resulting lack of enthusiasm, the bill may be passed in something similar to its current form simply because the task of building support has been so exhausting.