WASHINGTON — Senate Banking Committee Chairman Mike Crapo has cut a deal with several moderate Democrats to amend the Dodd-Frank Act and provide regulatory relief to financial institutions, the Idaho Republican announced Monday.
On the one hand, the deal is liable to be greeted warmly by industry representatives who have fought for a relief bill for several years. But it is more modest than many expected and fails to provide the sweeping relief many institutions had hoped for.
At the very least, however, it is a bill capable of passing the Senate. Republicans need eight Democrats on board to support the measure — and the announcement on Monday makes it clear that they have at least nine, including Sens. Heidi Heitkamp of North Dakota, Jon Tester of Montana, Joe Donnelly of Indiana and Mark Warner of Virginia.
“A strong and vibrant economy is important for American consumers, businesses, and the stability of the financial sector,” Crapo said in a press release. “The bipartisan proposals on which we have agreed will significantly improve our financial regulatory framework and foster economic growth by right-sizing regulation, particularly for smaller financial institutions and community banks. I thank all of the senators who have joined with us to move this forward, and look forward to continuing our work to achieve a robust, bipartisan legislative product.”
Among other things, the legislation would amend the Dodd-Frank’s $50 billion systemically important financial institution threshold, raising it to $250 billion, and make a number of legislative changes to mortgage regulations and capital formation.
Following is a guide to what’s in the deal.
Raising the SIFI threshold
Perhaps the biggest element of the relief deal is that it would quintuple the systemic threshold for banks, to $250 billion.
The bill would stagger how fast institutions would receive relief. Banks with assets of $50 billion to $100 billion would be immediately exempt from enhanced standards after the bill is signed. Bank holding companies with assets of $100 billion to $250 billion would be exempt 18 months after enactment. The bill says that the Federal Reserve Board would still be allowed to conduct periodic stress tests for banks above $100 billion and have the authority to apply or suspend enhanced standards.
The deal would be a boon for certain banks that are not far above the $50 billion threshold, like Zions Bancorp. in Utah. But it would leave out key players hopeful for relief, including the $456 billion-asset U.S. Bank in Minneapolis, the $361 billion-asset PNC Bank in Pittsburgh and the $280 billion-asset Bank of New York Mellon.
Overall, it would reduce the number of institutions automatically subject to enhanced standards to roughly 12.
The bill would establish a community bank leverage ratio between 8% and 10%. Banks and credit unions with less than $10 billion of assets that meet the ratio would be considered in compliance with capital and leverage requirements.
This is a potentially significant provision that would simplify the Basel III capital regime for smaller institutions. A House bill by Financial Services Committee Chairman Jeb Hensarling had provided an off-ramp for banks that agree to hold higher capital, though that ramp was not limited by size. Under the Crapo deal, small banks, most of which already hold that much capital, would benefit.
The deal provides financial institutions relief from a number of mortgage regulations, including restrictions for mortgages that are kept on a bank’s balance sheet or made by financial institutions with less than $10 billion in assets. The bill would deem those mortgages as “qualified mortgages” under Dodd-Frank, which would allow banks and credit unions to expand the types of mortgages they offer.
The bill would also remove the three-day way period required for new integrated mortgage disclosures if a creditor extends to a consumer a second offer with a better interest rate.
The deal would also provide an advantage to credit unions. Under the deal, one -to four-family mortgages that are not primary residences would not count against credit union business lending caps. Currently, such loans are treated as business loans.
The bill would exempt banks with less than $10 billion in assets from the Volcker Rule, which prevents banks from proprietary trading with customer deposits. If a bank’s total trading assets and liabilities are less than 5% of its total assets, they would also be exempt from the rule.
Call reports, exam cycle and brokered deposits
The deal would also allow banks with less than $5 billion of assets to file short-form call reports, raise the small bank holding company policy statement from $1 billion to $3 billion of assets and extend the examination cycle for well managed banks with less than $3 billion in assets to 18 months. The current threshold is $1 billion.
Additionally, the bill would make changes to how reciprocal deposits are treated by the Federal Deposit Insurance Corp. While they would still be considered brokered by the FDIC, a bank would not longer be forced to request a waiver for them, a process that can take several months, if they fell from well capitalized to adequately capitalized. Without a waiver, banks are forced to run off of their brokered deposits.
If the bill were to pass, it would benefit firms like Promontory Interfinancial Network, which runs a reciprocal deposit business so that institutions can offer higher deposit insurance coverage.
The bill includes a provision that would require credit bureaus like Equifax, Experian and TransUnion to allow consumers to freeze and unfreeze their credit at least once a year.
Liquidity and leverage adjustments
The deal would make tweaks to the regulators’ liquidity and leverage rules. It would direct regulators to treat qualifying investment-grade, liquid and readily marketable municipal securities as liquid assets under the liquidity coverage ratio rule.
It would also specify that funds of a custodial bank that are deposited with the Fed should not be taken into account when calculating the supplementary leverage ratio.
"Trust banks would finally get relief from the supplemental leverage ratio," wrote Jaret Seiberg, an analyst at Cowen & Co. "The bill would exempt for custodial banks deposits held at the central bank from the calculation of the supplemental leverage ratio. This does not mean that State Street and Bank of New York Mellon would escape their G-SIB designation. It would, however, make it easier for them to pass the CCAR stress test."
The bill would call for the Treasury Department to study the risks of cyber threats to financial institutions and the economy.