Assignment for Chapter Eighteen
Below are articles that give one an idea of the need and burden of regulation and its resulting compliance by (particularly) small banks.
Given the trend in the past, Congress sought to deregulate the banking industry, the reversal of the attitude of Government towards regulating the banking industry and the market place after the economic downturn of 2007- 2009, please explain from what you have read in these articles as to the focus of the Dodd-Frank Reform and what is happening today.
House votes to kill Dodd-Frank. Now what?
House lawmakers on Thursday advanced the “crown jewel” of the GOP-led regulatory reform effort, effectively gutting the Dodd-Frank financial regulations that were put in place during the Obama administration.
The Republican bill, called the Financial Choice Act, passed the House 233-186 along party lines. The bill seeks to undo significant parts of the 2010 financial reform law.
Crafted by House Financial Services Chairman Jeb Hensarling, the bill passed despite vehement objections by Democrats to preserve the sweeping law aimed at preventing another financial crisis and protecting American consumers. “Every promise of Dodd-Frank has been broken,” said Hensarling following his bill’s approval. “We will replace economic stagnation with a growing healthy economy.”
Republicans criticize the Dodd-Frank regulations as the primary driver for anemic economic growth in the U.S. and for enshrining too-big-to-fail, which they say paves the way for future taxpayer bailouts of the country’s biggest banks.
On Wednesday, House Speaker Paul Ryan told reporters Hensarling’s bill would keep the GOP’s promise to cut onerous financial regulations in order to help create jobs and foster economic growth.
“We see the Financial Choice Act as the crown jewel of this effort,” Ryan said at a press conference. “The Dodd-Frank Act has had a lot of bad consequences for our economy, but most of all in the small communities across our country.”
Related: House GOP bill would give Trump greater power over Wall Street regulation
Hensarling’s bill would give the president the power to fire the heads of the Consumer Financial Protection Bureau, a consumer watchdog agency created under Dodd-Frank, and the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae and Freddie Mac, at any time for any — or no — reason.
It also gives Congress purview over the CFPB’s budget, meaning lawmakers could defund the agency entirely.
The GOP proposal would also bar the Federal Deposit Insurance Corp. from overseeing the so-called living will process, which requires banks to write up plans on how they would safely be unwound in the event of a collapse. The FDIC and the Fed are the two regulators responsible for overseeing this requirement under the 2010 law.
Democrats objected to the bill calling it the “Wrong Choice Act.” They say it would return the country to the “regulatory Stone Age” and be a disaster for the U.S. financial system.
“This is a dangerous piece of legislation,” Steny Hoyer, the House minority whip said on the House floor on Thursday. He said the bill would repeat recent history and put Americans at risk of losing millions by taking “referees off the field.”
Related: Trump wants to revive a 1933 banking law. What that means is very unclear
Minority lawmakers also argue Hensarling’s bill would gut consumer protections and allow banks to make risky investments that required taxpayers to come to the rescue of the nation’s largest financial institutions almost a decade earlier.
“It’s shameful that Republicans have voted to do the bidding of Wall Street at the expense of Main Street and our economy,” said Maxine Waters, the top Democrat on the House panel.
So what’s next?
Now the bill’s destiny will be in the hands of the Senate.
Senate Republicans will likely seek to craft their own companion measure to overhaul the Dodd-Frank regulations.
Led by chairman Mike Crapo, the GOP senators say they want to take a bipartisan approach to creating a regulatory relief bill for Wall Street and community banks. Crapo has been working closely with his counterpart Sherrod Brown, a top Democrat on the panel, to find common ground.
“Democrats have shown we’re willing to work with Republicans to tailor the rules where it makes sense, but not if it means killing the reforms that have made the financial system safer and fairer,” Brown said Wednesday in a statement.
On Thursday, Hensarling said he regularly speaks with Crapo, who he said has “encouraged” him to pass the bill.
“I still think he has high hopes of putting together a companion legislation,” said Hensarling. “What a package would look like I don’t necessarily know,” he said, referring questions to Crapo.
Crapo has vowed to work with all stakeholders, including the Trump White House and regulators, “to strike a balance” in achieving smart regulation that spurs the U.S. economy.
The Idaho senator lauded the bill’s passage as a “positive move away from government micromanagement, and returns to basic principles of safety and soundness and market-driven principles.”
He has set his own target of early 2018 to pass major bank reform legislation.
Related: Wall Street hates the Volcker Rule. Will Trump finally kill it?
Unlike the House, Republicans will need to sway at least eight Democrats to pass a regulatory reform bill to cross the 60-vote threshold. GOP senators currently hold 52 seats in the Senate.
Those who closely follow the debate believe there’s no chance Hensarling’s bill would pass the Senate as is. Rather, they expect the upper chamber to advance a separate regulatory relief bill of their own.
“We continue to see no path forward for this legislation in the Senate,” said Jaret Seiberg, an analyst with Cowen & Co., in a note to clients ahead of the House vote.
Senate Republicans will have two options to advance President Trump’s promise to dismantle the “horrendous” Dodd-Frank law.
Related: Trump begins dismantling Obama financial regulations
They could try to pass a regulatory relief bill through reconciliation, which only requires a 50-vote majority to pass the Senate. That would likely mean a smaller number of limited changes to the Dodd-Frank Act rather than a major single legislative package.
Or they could leave the 2010 regulatory reform law intact and put the onus on regulators, like the Federal Reserve and the Federal Deposit Insurance Corp., to rewrite some of the rules.
“Much of the language in Dodd-Frank is vague and gives a lot of discretion to regulators on how they write the rules so, over time, I expect the Trump administration will amend some of the Dodd-Frank rules,” said Brian Gardner, a policy analyst with Keefe, Bruyette & Woods, in a podcast.
Related: Trump’s pick for No. 2 spot at Treasury drops out
Any changes to the Dodd-Frank regulations, however, require the approval of those in top regulatory posts at three bank regulatory agencies — the Fed, the FDIC and the Comptroller of the Currency — several of which the president has yet to nominate. Trump has yet to fill three open slots on the Fed board, including a new regulatory czar.
On Monday evening, the president tapped Joseph Otting, a former colleague of Treasury Secretary Steven Mnuchin at OneWest to run the Office of the Comptroller of the Currency. He will oversee more than 1,000 lenders, including big Wall Street banks. His position still requires Senate approval.
The spotlight on the financial reform this week could “convince the White House that it’s time to act on these key nominations,” said Seiberg..
House Republicans Move to Gut Bank Regulations
By ALAN RAPPEPORTMAY 5, 2017
WASHINGTON — Republicans took a big step toward repealing the Affordable Care Act on Thursday, and they took a small step toward dismantling another of President Barack Obama’s signature pieces of legislation, the Dodd-Frank Act.
With only the support of Republicans, the House Financial Services Committee voted in favor of the Financial Choice Act, a bill that would gut central financial regulations created in the aftermath of the 2008 financial crisis. The bill is expected to get a vote from the full House in the coming months. But, in its current form, it is not expected to pass in the Senate, where it would need support from Democrats to garner the necessary 60 votes.
The Choice Act would exempt some financial institutions from capital and liquidity requirements, essentially excusing them from the 2010 Dodd-Frank Act if they hold enough cash.
It would replace the Orderly Liquidation Authority, which critics say reinforces the idea that some banks are too big to fail, with a new bankruptcy code provision intended for large financial institutions.
It also would weaken the powers of the Consumer Financial Protection Bureau. Under the proposed law, the president could fire the agency’s director at will.
Republicans hailed the committee vote as a win for financial institutions. “Our plan replaces Dodd-Frank’s growth-strangling regulations on small banks and credit unions with reforms that expand access to capital so small businesses on Main Street can grow and create jobs,” said Representative Jeb Hensarling, Republican of Texas and chairman of the House Financial Services Committee.
After a long markup section, the nearly 600-page bill passed, 34 to 26. The 19 amendments Democrats offered were rejected.
They assailed the legislation as a giveaway to the banks. “The Wrong Choice Act is a deeply misguided measure that would bring harm to consumers, investors and our whole economy,” said Representative Maxine Waters of California, the ranking Democrat on the committee. “The bill is rotten to the core and incredibly divisive,” she said. “It’s also dead on arrival in the Senate, and has no chance of becoming law.”
Progressive groups argued that the push to unravel Dodd-Frank was at odds with Mr. Trump’s populist campaign message that the economy was rigged in favor of corporate interests.
“It is an enormous package of gifts for Wall Street and the worst actors in finance,” said Lisa Donner, executive director of Americans for Financial Reform, who said the bill House Republicans passed would increase the likelihood of another financial crisis.
American Bankers Association, cheered the committee’s vote. “The thousands of pages of new regulations facing banks have become a tremendous driver of decisions to sell or merge,” he said. “Given the cost of complying with all the new rules, some community banks are having to choose between meeting those regulatory requirements and meeting the financial needs of their individual and business customers.”
The Trump administration has been using executive directives to throttle Dodd-Frank while it waits for Congress to act. Last month, President Trump issued a memorandum asking Steven Mnuchin, the Treasury secretary, to review the Orderly Liquidation Authority, a tool created by Dodd-Frank for unwinding financial institutions that are on the verge of collapse. Mr. Trump also asked the Treasury to review the Financial Stability Oversight Council, which designates financial institutions as “systemically important,” better known as too big to fail. It requires them to hold more capital in reserve in the event of financial emergencies.
Mr. Mnuchin said at a Milken Institute conference in California this week that financial deregulation was one of his priorities. He assured the bankers in the audience that they would be pleased with his efforts.
“You should all thank me for your bank stocks doing better,” Mr. Mnuchin said.
Small banks vanish under weight of regulations, report says
BY TED GRIGGS
Community banks in Louisiana and throughout the United States are rapidly disappearing, and federal laws meant to protect the country from another megabank bailout have saddled smaller financial institutions with disproportionately large costs, a new UNO study shows.
The number of community bank charters plummeted 53.3 percent from 1993 to 2014, while the number of non-community banks jumped 17.6 percent, according to National and Regional Trends in Community Banking. The study was conducted by the University of New Orleans.
The causes include consolidation in the banking industry, competition from online banking and the crushing burden of “too big to fail” federal regulations, said Kabir Hassan, lead author of the study. The regulations are not working as intended to prevent the economy from being crippled if one of these megabanks fails.
“Actually in my reading, they have institutionalized it even further,” Hassan said. “And what it means is, when the law is made for a big bank, who suffers? The small, mom-and-pop community banks.”
Fewer of these banks — defined as having less than $1 billion in total assets — means less “relationship banking” and fewer opportunities for small businesses, he said. Community banks make nearly half of small loans to farms and businesses.
Those loans make less economic sense to large banks. It costs roughly the same to make a $100,000 loan as one for $1 million, but the returns are much different. So big banks aren’t interested in making loans of less than $2 million, which leaves lots of small businesses with no place to seek financing.
Hassan spoke at a community bank meeting organized by Gulf Coast Bank & Trust Co. Sen. David Vitter, chairman of the U.S. Senate Small Business and Entrepreneurship Committee, also spoke at the meeting in Baton Rouge.
Vitter said he hopes to distribute the study’s findings as widely as possible, starting with the Senate Banking Committee.
Although the downward trend in community banking is well-known, when these complaints are brought to Washington, D.C., there are typically two responses, Vitter said. The Washington-type experts deny it is happening or say it’s an unintended consequence.
“Well, it really doesn’t matter if it’s intended or not. That doesn’t change the reality,” Vitter said.
Vitter asked attendees how much it costs the banks to comply with the too-big-to-fail regulations.
Donnie Landry, president and chief executive officer of Tri-Parish Bank in Lafayette, said his bank is spending roughly $150,000 more each year to comply with the new regulations.
Other bankers said they live in fear that they may inadvertently violate rules hidden deep within the regulations.
“We spend more time and effort trying to not get fined or sued than just helping customers,” said Ann Duplessis, vice president of Liberty Bank in New Orleans.
Landry said Louisiana lost seven community banks in 2014, the biggest decline in several years.
When those banks disappear, so do sponsorships for high school yearbooks, the athletic booster club and jobs important to a small community, he said.
Tri-Parish employs about 35 people, he said. If Tri-Parish were sold to a big bank, that company would probably replace Tri-Parish with a branch employing only 10 or 12 people. Also, the new branch management might not have the same ties and loyalty to the community.
Gulf Coast CEO Guy Williams said the decline in community banking is troubling and particularly harmful to small business.
It’s imperative that industry regulations account for the vital role community banks play in the U.S. economy, he said.
Dodd-Frank proposed eight areas of regulation. Here are the major parts of the Act.
Regulate Credit Cards, Loans and Mortgages:
The Consumer Financial Protection Bureau consolidated the functions of many different agencies. It oversees credit reporting agencies, credit and debit cards, as well as payday and consumer loans (but not auto loans from dealers). The CFPB regulates credit fees, including credit, debit, mortgage underwriting and bank fees. It protects homeowners in real estate transactions by requiring they understand risky mortgage loans. It also requires banks to verify borrower’s income, credit history and job status. The CFPB is under the U.S. Treasury Department.
Oversee Wall Street:
The Financial Stability Oversight Council looks out for risks that affect the entire financial industry. It also oversees non-bank financial firms like hedge funds. If any of these companies get too big, it can recommend they be regulated by the Federal Reserve, which can ask it to increase its reserve requirement. This prevents another AIG from becoming too big to fail. The Council is chaired by the Treasury Secretary, and has nine members: the Fed, SEC, CFTC, OCC, FDIC, FHFA and the new CFPA.
Stop Banks from Gambling with Depositors’ Money:
The Volcker Rule bans banks from using or owning hedge funds for the banks’ own profit. That’s because they’d often use their depositors’ funds to do so. Banks can use hedge funds for their customers only. Determining which funds are for the banks’ profits and which funds are for customers has been difficult. Therefore, Dodd-Frank gave banks seven years to divest the funds. They can keep any funds if that are less than 3% of revenue. Banks have lobbied hard against the rule, delaying its implementation until at least 2013.
Regulate Risky Derivatives:
Dodd-Frank required that the riskiest derivatives, like credit default swaps, be regulated by the Securities Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). In this way, excessive risk-taking can be identified and brought to policy-makers’ attention before a major crisis occurs. A clearinghouse, similar to the stock exchange, must be set up so these derivative trades can be transacted in public. However, Dodd-Frank left it up to the regulators to determine exactly the best way to put this into place, which has led to a series of studies.
Bring Hedge Funds Trades Into the Light:
One of the causes of the 2008 financial crisis was that, since hedge funds and other financial advisers weren’t regulated, no one knew what they were investing in or how much was at stake. That’s why the Fed and other agencies thought the mortgage crisis would be confined to the housing industry. To correct for that, Dodd-Frank says that hedge funds must register with the SEC and provide date about their trades and portfolios so the SEC can assess overall market risk. States are given more power to regulate investment advisers, since Dodd-Frank raises the asset threshold limit from $30 million to $100 million. In January 2013, 65 banks around the world had registered their derivatives business with the CFTC. (Source: NYT Dealbook, Banks Face New Checks on Derivatives Trading, January 3, 2013)
Oversee Credit Rating Agencies:
Dodd-Frank created an Office of Credit Ratings at the SEC to regulate credit ratings agencies like Moody’s and Standard & Poor’s. Many blame the agencies for over-rating some bundles of derivatives and mortgage-backed securities. This mislead investors who didn’t realize the debt was in danger of not being repaid. The SEC can require agencies to submit their methodologies for review, and can deregister an agency that gives faulty ratings.
Increase Supervision of Insurance Companies:
It created a new Federal Insurance Office under the Treasury Department, which identifies insurance companies like AIG that create risk to the entire system. It will also gather information about the insurance industry and make sure affordable insurance is available to minorities and other underserved communities. It will represent the U.S. on insurance policies in international affairs. The new office will also work with the states to streamline regulation of surplus lines insurance and reinsurance. It was supposed to release a “Study and Report on the Regulation of Insurance” in January 2012. It was also supposed to report to Congress the impact of the reinsurance reforms prescribed by the Nonadmitted and Reinsurance Reform Act of 2010, and release an update by January 1, 2015. (Source: CFT News, Federal Insurance Office Requests Public Comment On Scope of Global Reinsurance Market, June 27, 2012)
Reform the Federal Reserve:
The Government Accountability Office(GAO) was allowed to audit the Fed’s emergency loans during the financial crisis. It can review future emergency loans, when needed. The Fed cannot make an emergency loan to a single entity, like Bear Stearns or AIG, without Treasury Department approval. (Although the Fed did work closely with Treasury during the crisis.) The Fed must make public the names of banks that received these loans or TARP funds. (Article updated April 3, 2013)
In New Congress, Wall St. Pushes to Undermine Dodd-Frank Reform
By JONATHAN WEISMAN and ERIC LIPTON
WASHINGTON — In the span of a month, the nation’s biggest banks and investment firms have twice won passage of measures to weaken regulations intended to help lessen the risk of another financial crisis, setting their sights on narrow, arcane provisions and greasing their efforts with a surge of lobbying and campaign contributions.
The continuing assault on the 2010 Dodd-Frank law has achieved remarkable success, especially compared with the repeated failures of opponents of another 2010 law, the Affordable Care Act.
The financial industry has been methodical, drafting technically complicated legislation that can pass the heavily Republican House with a few Democratic votes. And then, once approved, Wall Street has pushed to tack such measures on to larger bills considered too important for the White House to block.
The House was back at it this week. Lawmakers approved by a vote of 250 to 175, with just eight Democrats in support, a broad measure to impose a variety of new restrictions on federal regulators, like stricter cost-benefit analyses and an expansion of judicial review. That measure would affect every regulatory agency, be it the new Consumer Financial Protection Bureau or the century-old Food and Drug Administration. And like past attacks on the health care law, it has little chance of overcoming a threat of a presidential veto.
But House members also took up a narrower measure that would slow enforcement of Dodd-Frank requirements and weaken other regulations on financial services companies. The legislation will almost certainly pass on Wednesday with Democratic support, and although its future as a stand-alone bill is not bright, elements of it are expected to return on spending bills and other must-pass legislation in the future.
“This all works together: Put it up for stand-alone vote, get some Democrats on it, and then when you push it onto a must-pass bill, say it’s a bipartisan bill that’s already passed,” said Marcus Stanley, policy director of Americans for Financial Reform, which favors tighter regulation of Wall Street. “The strategy on Dodd-Frank is death by a thousand cuts.”
Even with other interest groups seeking the same consideration, the financial industry likes its chances.
“There are limited opportunities for action in both the House and Senate,” said James Ballentine, a lobbyist at the American Bankers Association. “And the moving trains generally have a lot of passengers on them.”
Proponents of regulation say that they are badly outgunned by an army of Wall Street lobbyists, and complain that the Obama administration has been too weak in its response.
“The president was slow in drawing the same kind of line on financial reform that he did on health care,” said Barney Frank, the retired chairman of the House Financial Services Committee who helped write Dodd-Frank.
The current efforts to undermine Dodd-Frank have been textbook lobbying. In the first three quarters of last year, the securities and investment industry spent nearly $74 million on lobbying — on 704 registered lobbyists — according to the Center for Responsive Politics. That was on track to easily beat out the $99 million spent in 2013.
The Securities Industry and Financial Market Association, Wall Street’s biggest lobbying group, had spent $5.8 million alone through September, the last data available. The group spent $5.2 million in all of 2013.
Lobbying expenditures by every specific industry group declined in 2014, except for the finance, insurance and real estate sector. That sector increased its spending by 2.5 percent.
As of Nov. 16, Wall Street banks and other financial interests had spent $1.2 billion on campaign contributions and lobbying combined, a total that was on track to beat spending in 2010, when Dodd-Frank was being considered in Congress, according to Americans for Financial Reform.
And Wall Street has been a steady donor, particularly to members of the House Financial Services Committee, where the legislation typically gets started. During the last Congress, Representative Jeb Hensarling of Texas, the Republican chairman of the committee, received donations on 13 separate occasions from political action committees run by Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase.
Of even greater importance, no influential business group opposes Wall Street’s effort, making more Democrats open to the campaign. By contrast, while the Affordable Care Act, popularly known as Obamacare, might have powerful interests — like the U.S. Chamber of Commerce and the National Federation of Independent Business — against it, the health insurance and hospital industries, along with leading pharmaceutical companies, are strongly opposing its repeal.
“In American politics, when a particularly economically motivated group gets behind something, that can be more powerful than an ideological viewpoint,” Mr. Frank said, comparing his law to the Affordable Care Act. “Nobody who makes their money in health care is going after that bill. There are a lot of people making money in finance that are going after this bill.”
Financial industry lobbyists say they are being unfairly pilloried. The changes they have won and further revisions they seek do not undermine the core of Dodd-Frank, they say. What has changed, they contend, is the rise of Senator Elizabeth Warren, Democrat of Massachusetts, whose vocal attacks on Wall Street and its denizens have polarized the issue.
Sam Geduldig, who represents financial services companies, called her a “game changer.”
“Legislation now almost has a Warren litmus test, the liberal version of what is happening in the Republican Party with libertarians and Tea Party conservatives,” he said. “If Warren describes something as a gift to corporate industry, you have to kind of walk through that gantlet.”
Separately, MetLife, the insurance company, went to court on Tuesday challenging its designation as a “systemically important financial institution,” a label under Dodd-Frank that allows regulators to impose tighter rules aimed at lessening risk-taking that might threaten the overall financial system.
Administration officials say the tide is turning in their favor. Last week, the House tried to pass a measure that would delay by two years Dodd-Frank’s requirement that banks sell off collateralized loan obligations, the bundled debt that helped cause the 2008 financial collapse. The bill was even titled the “Promoting Job Creation and Reducing Small Business Burdens Act.”
But this time, most Democrats banded together against it, and the bill failed to get the two-thirds majority needed to pass under fast-track House rules. (Thirty-five Democrats did vote for it.)
Treasury Secretary Jacob J. Lew, in an opinion article this weekend, said President Obama was “prepared to defend the gains we have made against attempts to water down protections and expose the economy to the risky practices of the past.”
That measure is now back on the House floor under normal rules that require only a simple majority to pass, and the White House has issued a veto threat against the bill, which officials said puts “working- and middle-class families at risk while benefiting Wall Street and other narrow special interests.”
But those stands came only after other Wall Street-backed measures were attached to December’s spending bill that funds the government through September and last week’s bill reauthorizing federal terrorism insurance. Both were signed into law.
“You can argue that of all the very powerful special interests that work in this city, Wall Street is at the top of list,” said Senator Bernie Sanders, an independent and liberal populist from Vermont.
For all its sway in Washington, Wall Street is also widely reviled. So, one of the secrets to its success is wrapping itself around a friendlier cause. Lobbyists have contended that measures long sought by the biggest banks and investment houses are actually for community banks, small businesses, farmers and ranchers.
“They have been very expert at controlling the narrative thus far,” said Cornelius Hurley, director of the Boston University Center for Finance, Law and Policy.
One of Congress’s last acts of 2014 was to pass a measure largely repealing a Dodd-Frank provision that required banks to push the trading of exotic financial instruments known as derivatives into subsidiaries that are not eligible for deposit insurance and other forms of government support. Members of Congress, echoing Wall Street’s lobbying pitch, said the so-called swaps push-out rule was too onerous for small community banks.
In fact, according to the Office of the Comptroller of Currency, 95 percent of derivatives trading is conducted by five firms: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley. By keeping such activity under their federally regulated banking arms, those behemoths get to keep borrowing costs down.
Mr. Ballentine, the banking industry lobbyist, said the chance of success had also increased as turnover in Congress reduced the number of lawmakers who voted on Dodd-Frank.
“There is a strong possibility, a strong possibility, that every single sentence in Dodd Frank is not perfect,” he said. “And the newer members, they are not wed to every single word.”