Bloomberg News
Bloomberg News Adding regulatory relief measures to the appropriations bill "is another step in the process of moving a sensible proposal forward in the Senate," said Sen. Richard Shelby, R-Ala.

WASHINGTON — Just a day after the Dodd-Frank Act's fifth anniversary, Senate Banking Committee Richard Shelby launched a new attempt to make significant changes to the law, attaching his regulatory relief bill to legislation that would provide funding for financial services agencies.

A Senate Appropriations subcommittee approved the bill on Wednesday and the full panel is expected to vote on it Thursday.

The move marks a shift in tactics by Shelby. He had said he would negotiate with Democrats, who opposed the regulatory relief legislation when it passed the Banking Committee in May, in order to strike a bipartisan compromise.

"It's a shot across the bow to Democrats," said Ed Mills, a policy analyst at FBR Capital Markets. "It's saying, 'Look, if you are unwilling to work with us, we are going to do what we can.'"

The move is not unexpected, however. Shelby is the No. 2 Republican on the Appropriations Committee and observers have long speculated he would resort to using that process in an effort to pass regulatory relief.

On its own, the regulatory relief bill, which among other things would raise the level at which banks are considered systemically important and enact changes to the systemic designation process for nonbanks, lacks the necessary support to be brought up for consideration by the full Senate.

By attaching it to a separate appropriations bill that covers a number of agencies such as the Treasury and Judiciary departments — legislation that is typically considered more urgent because it funds the government — the hope is that many or all of these changes can be enacted. Republicans successfully used the appropriations process last year, for example, to water down a key swaps provision in Dodd-Frank, even though Democrats and President Obama opposed the change.

At the very least, the move appears designed to put pressure on Democrats to cut a deal on the regulatory relief bill.

"The threat of appropriations is an attempt to force Democrats to the table," said Jaret Seiberg, an analyst with Guggenheim Securities. "This preserves the ability to use the appropriations process if broader negotiations fail."

Yet the tactic could also backfire as Democrats see the move as an underhanded way to weaken Dodd-Frank.

"The hope of finding that bipartisan compromise gets harder and harder when Democrats don't feel Republicans are acting in good faith as part of those negotiations," Mills said. "This emboldens Democrats."

Sen. Sherrod Brown, the top Democrat on the Banking Committee, condemned the appropriations move.

"Congressional Republicans have had ample opportunity to work with Democrats to strengthen and improve Wall Street reform, but instead they're carrying water for special interests at consumers' expense," the Ohio Democrat said in a press release on Wednesday. "Tucking Senator Shelby's sprawling, partisan bill in the financial services appropriations bill rather than having an open debate on it is a concession that this legislation cannot stand on its own."

But Shelby insisted that he has not given up on a bipartisan deal.

"The inclusion of the 'Financial Regulatory Improvement Act of 2015' in the subcommittee mark of the FY 2016 Financial Services Appropriations bill is another step in the process of moving a sensible proposal forward in the Senate," the Alabama Republican said in a press release. "It remains my strong preference that we find a way to come together on a bipartisan basis."

In an attempt to up the ante, however, the appropriations bill also includes controversial financial services provisions that are not part of Shelby's regulatory relief bill. The appropriations bill would subject the funding of the Consumer Financial Protection Bureau to Congress, a key goal Republicans have sought since the agency was created. It would also replace the agency's single director with a five-person commission. Both changes are strongly supported by the financial services industry, which views them as a way to rein in the CFPB.

Still, those changes are politically toxic for Democrats and appear added to the bill by the Republicans as a negotiating tactic.

"If it was so easy to make those changes through appropriations, it would have happened already," Seiberg said.

Exactly how the debate plays out from here is unclear. Some said that an appropriations bill that includes all of the regulatory relief measures is highly unlikely to pass.

"We expect Congress will be unable to pass most of the appropriations bill and will, instead, pass a continuing resolution to fund the government," wrote Brian Gardner, an analyst with Keefe, Bruyette, and Woods in a note to clients. "CRs are usually 'clean' bills that lack policy riders like the Shelby bill so we doubt the Shelby bill will progress via the appropriations process. Instead, we expect negotiations on the Shelby bill will continue into the fall through the normal legislative process."

Indeed, President Obama would likely veto any appropriations bill that included this many changes to Dodd-Frank given his pledge, repeated as recently as Tuesday, to defend the reform law.

Still, some analysts said a deal is likely given that many Democrats, too, would like to see some of the provisions of the Shelby bill pass.

Among the less controversial measures, the bill includes relief from annual privacy disclosure requirements, permission for privately insured credit unions to become members of the Federal Home Loan Bank system, an exemption for banks under $10 billion of assets from the Volcker Rule and a requirement that the National Credit Union Administration both hold public hearings and receive public comment about its budget.

The bill would also make some changes to the housing finance system and create an independent commission to evaluate the Federal Reserve's structure and suggest changes.

Democrats like Brown have said they are willing to deal on one of the bill's biggest changes — to raise the $50 billion asset threshold for banks to be considered systemically important. Shelby's bill would raise it to $500 billion, which Democrats say is too high.

"There is still a real desire to get something done," said Mills. "There's too much support for these changes for there to be nothing. Ultimately, this is all part of the kabuki dance before a deal."

Subscribe Now

Authoritative analysis and perspective for every segment of the mortgage industry

30-Day Free Trial

Authoritative analysis and perspective for every segment of the mortgage industry