Big banks try to weaken Dodd-Frank
The first significant bipartisan attempt to alter rules established after the 2008 financial crisis is turning into a battle on Capitol Hill, as some of the biggest Wall Street banks seek to weaken a crucial requirement aimed at ensuring that they can withstand financial losses.
The Senate plans to vote this week on a bill aimed at allowing hundreds of smaller banks to avoid some of the stricter federal rules ushered in as part of the 2010 DoddFrank law, while leaving the toughened regulatory regime largely intact for the nation’s biggest banks.
But a little-noticed provision, which creates a small exemption to a capital requirement meant to prevent banks from running into the same type of financial crunch that helped tip the economy into the Great Recession, is being seized on by major banks including Citigroup and JPMorgan Chase. They are pushing to expand the exemption in a way that analysts and former government regulators say would undermine a central pillar of the Dodd-Frank law.
“Even though this fight hasn’t garnered as much attention, its impact is significant,” said Isaac Boltansky, policy research director for Compass Point, an investment bank. “It signals the next round in the Dodd-Frank wars.”
The push marks a political turning point for the big banks, which have largely kept a low profile after the financial crisis while they worked to regain favor with the public and with lawmakers. The few prominent attempts they made to raise their heads and influence policy quickly turned ugly. Citigroup, for example, was heavily criticized in 2014, when it became clear that the bank had heavily influenced language in a spending bill that would have rolled back certain post-crisis rules related to derivatives. Sen. Elizabeth Warren, D-Mass., blamed the bank’s sway over Republican lawmakers in the House of Representatives for nearly shutting down the government.
Now, less than four years later, the big banks are buoyed by a White House and Congress that sees deregulation as an overarching goal.
That has helped fuel efforts to relax some post-crisis rules that toughened oversight on all banks, regardless of their size and the risk their stumbles could pose to the financial system. The current push involves one such rule, which requires banks to hold a certain level of capital on their balance sheets based on their total asset size, regardless of how risky those assets are. For instance, cash or customer deposits held at the Federal Reserve are treated the same as riskier assets like subprime mortgages or junk bonds. The rule, known as the supplementary leverage ratio, is aimed at keeping banks from being able to take big risks without properly preparing for a disaster.
The Senate bill, sponsored by Mike Crapo, R-Idaho, would create a small exemption. As it is currently worded, it would most likely apply to just three banks, all of which take deposits primarily from large asset managers and other banks, rather than Main Street customers, and are known as custody banks.
The three custody banks — Bank of New York Mellon, State Street and Northern Trust — would, when calculating how much capital to hold on their balance sheets, be able to set aside deposits they received from other banks and immediately gave to the Federal Reserve or another central bank for safekeeping.
Jennifer Hendricks Sullivan, a spokeswoman for Bank of New York Mellon, said in an email that the exemption was structured in a way that “recognizes the unique business model of the custody banks.”
Citigroup and JPMorgan argue that the exemption is not fair. They say that since they, too, take deposits from other banks and stash them at the Fed, they should get the same relief — even though that is not the primary focus of their business. Lobbyists for the two banks are hoping to persuade lawmakers to change the bill to allow all banks that accept custodial deposits to take advantage of the exemption, according to people familiar with the banks’ efforts who spoke on the condition of anonymity because they were not authorized to discuss those efforts.
“As Congress has sought to make a common sense change to the way capital rules treat custody assets, we have asked that they apply that change to all custody banks to maintain a level playing field in this important business,” a Citigroup spokesman said in an email Friday.
Spokesmen from JPMorgan and State Street declined to comment.
Whether the language is broadened or not, the presence of a carve-out has made supporters of the law’s original capital requirement nervous. They say its purpose is to keep banks from convincing regulators that certain products aren’t dangerous when they may ultimately pose a risk.
“This is not a tweak,” said Sheila C. Bair, former chairwoman of the Federal Deposit Insurance Corp. “This could be a very significant weakening of bank capital rules.”
Even if the bill fails, the Fed could ease the burden on banks. Fed Chairman Jerome Powell said in congressional testimony last week that he favored changing the way the entire leverage ratio is calculated, which would naturally benefit the three custody banks, without making any special exceptions for them.
An aide to a Democratic senator who supports the legislation insisted that no changes would be made to benefit big banks like Citigroup. But members of the progressive wing of the Democratic Party have been mounting resistance to the entire bill.
Warren took to Twitter on Friday and warned that the bill, which she called the “bank lobbyist act,” benefits only big banks and said she was planning a series of public events to decry the legislation.
And Sen. Sherrod Brown, D-Ohio, who sits on the Senate Banking Committee, said in an interview that lawmakers who support the bill were suffering from “collective amnesia” about the financial crisis.
“Dozens of my colleagues think it’s important for banks to make more money,” Brown said. “The public is not calling for us to deregulate Wall Street.”