Are Banking Regulations About to Ease ?

A Senate bill with bipartisan support would significantly ease the regulatory burden placed on banks by Dodd-Frank legislation passed during the Obama administration following the 2008 financial crisis, The Washington Post reports.

The bill, which is favored by Republicans but also has more than a dozen Democratic supporters, aims to provide relief to midsize and regional banks. The bill’s supporters say Dodd-Frank unfairly lumps smaller banks in with the largest financial institutions, making it difficult or impossible for them to survive.

What is Dodd-Frank?

The Dodd-Frank Wall Street Reform and Consumer Protection Act, named after former Sen. Christopher Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), serves two purposes: Regulate the financial industry to prevent major collapses like the one in 2008, and protect consumers from abusive lending practices.

The 2008 financial crisis occurred largely due to risky investments that started at the local level and got sold up the chain.

Local mortgage brokers offered subprime home loans to consumers at high-risk of default, and those loans were sold to larger firms and subsequently bundled in bonds and sold worldwide.

When large numbers of homeowners defaulted, the bonds, and other assets based on the bonds, collapsed.

Dodd-Frank made it more difficult for banks to use these unstable financial products by increasing supervision and making mortgage lending rules more strict, created the Consumer Financial Protection Bureau to protect borrowers, and created a system for the orderly dissolution of a large failed financial company.

Why would that be rolled back?

Some feel that Dodd-Frank was an overreaction to the financial crisis, and that the resulting regulations have crippled small- and mid-size financial institutions, punishing them for the mistakes of Wall Street.

Sen. Jon Tester (D-Mont.) said the regulations have caused banks in his state to go out of business, and said this bill helps out midsize and regional banks without letting Wall Street off the hook.

“The Main Street banks, community banks and credit unions didn’t create the crisis in 2008, and they were getting heavily regulated,” Tester said according to The Washington Post. “There’s not one thing in this bill that gives Wall Street a break.”

What would the bill do?

The bill would exempt financial companies with assets between $50 billion and $250 billion from the Federal Reserve scrutiny mandated by Dodd-Frank. Only banks with more than $250 billion in assets, of which there are fewer than 10, would receive the highest level of regulatory scrutiny.

What’s the argument against this bill?

Critics say that Dodd-Frank has been successful in preventing financial crises, and that even partial repeals of the law carelessly increase the risk that another collapse could take place.

“On the 10th anniversary of an enormous financial crash, Congress should not be passing laws to roll back regulations on Wall Street banks,” Sen. Elizabeth Warren (D. Mass.) said. “The bill permits about 25 of the 40 largest banks in America to escape heightened scrutiny and to be regulated as if they were tiny little community banks that could have no impact on the economy.”

What are the chances of the bill passing?

The bill has a good chance of getting the necessary 60 votes in the Senate because of the significant Democratic support.

The House has passed a bill already that would roll back Dodd-Frank even further. But, Senate Democrats have expressed resistance to significant changes to the Senate bill, which could make reconciliation with the House bill more difficult.

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