- The Senate appears set this week to pass the Economic Growth, Regulatory Relief, and Consumer Protection Act.
- The bill, more commonly known as the Crapo bill, includes a rollback of many banking regulations.
- While it is designed to ease the burden on small community banks, it would also benefit larger regional banks and credit reporting agencies.
The biggest overhaul of the US financial system’s regulatory structure is set to pass the Senate this week in a move that could relax some of the most stringent post-financial crisis for dozens of banks.
Supporters of the bill — officially known as Economic Growth, Regulatory Relief, and Consumer Protection Act but more commonly referred to as the Crapo bill after its author, Senate Banking Committee Chair Mike Crapo — say it will free up regional banks from burdensome regulations and give consumers easier access to credit.
Opponents, such as Sen. Elizabeth Warren of Massachusetts, say the bill will increase risk in the financial system and possibly set the industry up for another devastating crisis.
Despite pushback from Warren and other Democrats, the bill appears to be in great shape to pass the Senate. A slew of moderate Democrats, particularly those running for 2018 reelection in states President Donald Trump won in 2016, have jumped on board.
The ‘SIFI’ change
The bill’s most consequential provision would come from an increase in the threshold for a financial institution to be designated a Systemically Important Financial Institution, or SIFI — to $ 250 billion in assets from the current $ 50 billion.
The move has long been favored by Republicans in Congress, the Trump administration, Treasury Secretary Steven Mnuchin, and some Democrats.
Banks that are designated as a SIFI must adhere to stricter rules and oversight. For instance, SIFI institutions must produce “living wills” that lay out how a bank would sell off assets in the event of a bankruptcy without disturbing the broader financial system.
This would affect several large regional banks, like BB&T, Fifth-Third Bank, and SunTrust, which would no longer be subject to the more stringent SIFI rules. The total number of SIFIs would drop to 12 from the current 38.
Lawmakers that favor the bill say the SIFI designation was never meant to apply to these regional banks and that the burden of regulation is making it difficult for them to operate and consumers to access credit.
Opponents of the bill note that some institutions that helped precipitate the financial crisis had a smaller asset pile than the proposed $ 250 billion threshold, however. Warren pointed to Countrywide, a mortgage lender that helped contribute to the crisis and held around $ 210 billion in assets.
“If this bill passes, the next Countrywide will be regulated as if it were some tiny, little community bank,” Warren said. “That’s staggeringly dangerous for the American economy.”
In addition to the SIFI adjustment, the Crapo bill also includes several proposed tweaks for smaller banks and other financial institutions. Most of those changes are designed to ease regulation and allow businesses to engage in different types of lending and investing.
Here’s a rundown of some of the other major provisions. The bill would:
- Increase the threshold for banks to undergo the annual street test from the Federal Reserve, to $ 250 billion from the current $ 10 billion. Banks with assets between $ 100 billion and $ 250 billion would have to wait 18 months for an exemption and could still be tested periodically. If an institution fails these stress tests, which judge the systemic risk from the bank in the event of a severe downturn in asset values, the bank could be subject to additional regulations.
- Exempt banks with less than $ 10 billion in assets from the so-called Volcker Rule. The rule, named after former Fed chair Paul Volcker, prohibits depository institutions from engaging in proprietary trading and investing in certain hedge funds and private equity firms — cutting down on the type of risky investments a bank can make.
- Include carve outs for smaller community banks with less than a certain amount in assets, relaxing rules on what types of real estate loans the banks can make and how much capital they need on hand.
- Force credit reporting agencies like Equifax and TransUnion to give consumers free credit freezes, but also shield the agencies from certain class action lawsuits and allow the firms to offer credit checks for mortgage applications.
Crapo released some minor last-minute adjustments to more closely adhere to the House’s conservative approach to deregulation, said Jaret Seiberg, a financial services analyst at Cowen Washington Research Group. Moving it closer to the House’s goals, he said, is an attempt to ease the bill’s passage.
“To us, this suggests that Senate GOP leaders want the House to simply approve the Senate bill as written rather than adopt changes that would require a conference,” Seiberg wrote in a note to clients on Monday. “A conference could push enactment of the bill to fall and even put enactment at risk as it is hard to see the Senate accepting any other changes.”
While the timing of a vote on the bill is uncertain, the Senate must first go through a series of proposed amendments. A vote to prevent a filibuster passed easily Monday. Issac Boltansky, a policy analyst at the research firm Compass Point, said that indicates the full bill should get through the Senate this week.
“Notably, the contingent of moderate Democrats supporting the bill held through this vote, which signals that passage remains likely,” Boltansky wrote on Tuesday. “Although lawmakers are still lacking a time agreement to consider amendments, all indications are that the Senate will clear the bill this week.”