WASHINGTON — Democrats on the Senate Banking Committee showed sharp differences with each other Thursday over the pending regulatory reform bill, with Wall Street hawks framing it as a giveaway to big banks while moderate supporters called it a sensible recalibration of a complex law.

The differing visions, which were offered during a hearing with new Federal Reserve Board Chairman Jerome Powell, demonstrated escalating tensions among Democrats as the legislation nears a possible full chamber vote next week. Progressive groups have been blasting the bill, attempting to sway current supporters away from it.

The committee’s top Democrat, Sen. Sherrod Brown of Ohio, likened the reform legislation to the tax bill the president signed last December that, he said, greatly benefited the wealthy. Brown also said the bill would enable the Fed to loosen regulations on foreign banks — which the central bank regulates as international holding companies — citing the Treasury Department’s desire to ease regulations on those entities.

“Many, many of us in this body are concerned about this deregulation bill,” Brown said. “Especially when it comes to foreign banks, those banks that are huge, but their assets in this country are under $250 billion. They are both troubled and troubling banks, in their international operations.”

Jerome Powell, chairman of the Federal Reserve, speaks during a House Financial Services Committee hearing in Washington.
"We’re very capable of reaching below $250 billion to apply enhanced prudential standards when it’s appropriate," said Federal Reserve chair Jerome Powell. Bloomberg News

Both sides attempted to draw Powell into the fray.

In response to Brown, Powell said that the bill would primarily rescind the automatic designation of banks over $50 billion in assets as systemically important financial institutions and subject them to enhanced prudential standards as a matter of course. But the bill does nothing to directly benefit the global systemically important banks, or G-SIBs, and preserves the Fed’s ability to apply enhanced prudential standards on banks below $250 billion in assets.

“The parts of the bill that I’m familiar with really apply to bank of $250 billion and under,” Powell said. “When you say ‘largest banks,’ I think you’re talking about either the eight [G-SIBs] — by the way, one of which is below $250 billion in assets, so we’re very capable of reaching below $250 billion to apply enhanced prudential standards when it’s appropriate — but it’s really those institutions that I would call the large and complex institutions.”

Sen. Mark Warner, D-Va., a moderate who supports the pending reform bill and called Dodd-Frank one of the best bills he ever voted for, asked Powell whether the changes that the bill makes to the stress testing regime would result in weaker stress testing.

“My view is that stress testing is the most important prudential standard, and that frequent stress tests are some of the best tools that we have to prevent another financial crisis,” Warner said. “Can you give us your views on stress testing, including how rigorous they should remain, and how frequent they should remain, on bank between $100 billion and $250 billion in assets if this legislation passes?”

Powell responded: "We do believe that supervisory stress testing is probably the most successful regulatory innovation of the post-crisis era. We’re strong believers in this tool. It would be our intent, if this bill is enacted … to continue to have meaningful, strong, regular, periodic stress tests — frequent stress tests. We view it as a very important tool for these institutions.”

The Senate regulatory relief bill amends the 2010 financial reform law by requiring that the Dodd-Frank Act Stress Test, or DFAST, be conducted on a “periodic” basis, rather than an “annual” basis. The Fed’s more strenuous Comprehensive Capital Analysis and Review stress test is not codified in Dodd-Frank but is conducted based on the central bank's pre-existing supervisory authority. The change leaves open the possibility that the Fed might move away from an annual stress testing exercise, and Powell’s comments, while intended to reassure Warner, did leave open that possibility.

Other Democrats opposed to the regulatory reform bill — particularly Sen. Catherine Cortez Masto — criticized the bill’s changes to the Home Mortgage Disclosure Act that would revert the data collection requirements back to the demographic data categories in place before Dodd-Frank.

Powell said the bill’s changes to HMDA data disclosure requirements would not affect the Fed’s ability to assess unfair or discriminatory practices in lending by banks or their Community Reinvestment Act reviews, because they are able to ascertain those practices using the historical data sets.

“We get everything we need from the historical data, and we can continue to work on that basis,” Powell said.

"That's my concern," Cortez Masto said. "The more data, the better. You’re creating a data unit, because data is key to your decision-making. And my understanding is that the data you are using as part of your CRA exams seems to exclude relevant data points.”

Powell reiterated that he felt the agency could root out discrimination without the enhanced data requirements laid out in Dodd-Frank.

“Any kind of discrimination — by race, or gender or any other unfair basis — in lending is completely unacceptable and we are committed as an institution to finding it, and using all our tools to stop it,” Powell said.

Sen. Heidi Heitkamp, D-N.D., a supporter of the Dodd-Frank reform bill, said that the costs of compiling the additional HMDA data — particularly for small banks and lenders — can be crushing, and it is incumbent on Congress to respond to those kinds of concerns, or else lenders will demand that the HMDA data disclosures be thrown out entirely.

“When you don’t respond to these kinds of concerns — legitimate concerns — from small lenders, there’s resentment to the overall policy,” Heitkamp said. “We tend to throw the baby out with the bathwater because of the level of frustration.”

Sen. Elizabeth Warren, D-Mass., sidestepped the question of the Dodd-Frank bill entirely, instead focusing her questioning on the Fed’s recently issued enforcement action against Wells Fargo. That order arose out of several customer complaints in recent years, including a massive cross-selling scandal and complaints related to the company’s auto insurance offerings.

The enforcement action caps the bank’s growth at its December 2017 level and requires the firm to develop risk management and internal controls to prevent these kinds of abuses from happening again. The bank is expected to submit these plans to the Fed for approval next month, but Warren asked whether the board would vote on the plans, as opposed to allowing staff to handle it.

“We have delegated that approval to, I believe, the head of supervision,” Powell said. “But of course … ”

“To staff,” Warren interjected.

“I assure you that will take place in serious consultation with the board,” Powell said.

“Consultation?” Warren said. “But the board is not going to vote on this?”

“That’s not the plan,” Powell responded.

“Well, you know, I don’t understand this,” Warren said. “The Fed has issued a major, unprecedented consent order against one of the biggest banks in the world and the Fed board — the people who are actually appointed by the President and confirmed by the Senate — aren’t going to vote on whether the order is actually being followed?”

“Well, of course, we did vote unanimously on whether to [issue the order],” Powell said.

“No, but whether the order is actually being followed,” Warren shot back. “In my view staff is not good enough. Will you consider requiring a vote of the Fed board before these plans are approved?”

“Yes,” Powell said.

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