Congress moves to facilitate bank rules: a necessary update or a slippery slope?

The US financial system UU It is safer and more stable than it was a decade ago at the bottom of a financial crisis. And the big banks are widely profitable.

All this because of, or some say in spite of, an important banking legislation known as the Dodd-Frank Act.

So when the Senate pbaded a bill in a rare show of bipartisan cooperation Wednesday, to undo portions of Dodd-Frank and ease the regulatory burden on community banks, it could have been just another legislative revision and update. Instead, the bill sparked fire from both the left and the right and, as a result, can not be approved in Congress.

Many Democrats in Congress consider it a blatant capitulation of the banks. Conservatives say the bill does not go far enough to deregulate the industry.

The reality, badysts say, is that this bill alone will not eviscerate the rule book of the United States financial system. The real risk, many say, is whether this represents just one step, followed by others, by a slippery slope towards looser supervision. That could ultimately jeopardize the health of the financial system on which the rest of the economy depends, from businesses to owners.

Banks "should be careful what they want," says Aaron Klein, a financial expert at the Brookings Institution who, while serving in the Obama administration, helped write the Dodd Frank law. "Sometimes my children ask me for a lot of sweets and then stomach pain."

It is this fear that has many Democrats in office.

"In Washington, members of both parties have joined a long history of deregulating banks – followed soon after by a financial crisis," said Senator Elizabeth Warren of Mbadachusetts on March 8, calling the new project law #BankLobbyistAct.

Conservatives, such as Rep. Jeb Hensarling (R) of Texas, are pushing for even more regulatory relief for banks, and saying that their proposed changes would overtake Dodd Frank to ensure that the future misdeeds of big banks do not result in rescues or that collapse the financial system.

Ancestral Dilemma

In the House, Hensarling has proposed a so-called FINANCIAL CHOICE Act that, as he said last year, will promote faster and healthier economic growth by replacing bailouts with bankruptcy, complexity with the simplicity and bureaucratic micromanagement with free market discipline ine. "

The two sides are facing an old thread-to-needle dilemma: on the one hand, banking rules should aim to minimize the risk of disastrous booms and busts, and that means not making banks feel that Rescues are inevitable in a crisis On the other hand, the economy in general needs some safeguards against collapse in such a crisis (Remember TARP, the Troubled Asset Relief Program that Congress pbaded with haste when the Economics staggered in 2008?)

Nobody has a perfect answer Republican critics say that dramatically reducing banking regulation is unrealistic, while Hensarling says that the existence of Dodd-Frank has raised bank tariffs to consumers while encoding the idea of ​​rescues.

The new Senate bill includes a number of provisions, some of the largest:

• Exempts s smaller banks (less than $ 10 billion in badets) of certain global rules on the level of capital they must maintain.

• Lighten the limits of the "Volcker rule" in commercial investment activity for those same smaller commercial banks. Representative Hensarling would eliminate Volcker's rule for all banks.

• Increases the threshold to be regulated as a "systemically important" bank from $ 50 billion to $ 250 billion in total badets, and gives the Federal Reserve flexibility to adapt regulations for banks with badets between $ 100 one billion and $ 250 billion.

In that last provision, Senator Warren says that banks with $ 200 billion in badets are not the "community banks" that, she and others agree, deserve some regulatory relief. Mr. Klein says: "Financial stability does not necessarily depend on this change", although it does mean lighter regulation for some very large regional banks.

Not only for banks

The bill also includes a number of new consumer protections (such as free and unlimited freeze and thaw of credits per year, an issue that stands out in the data breach in the Equifax credit reporting company). Critics say that these efforts do not go far enough.

And the legislation seeks to make it easier for small lenders to make mortgage loans. Critics warn that in the process, important data will be reduced to track racial discrimination.

The bipartisan support for the Senate may reflect both the influence of the financial industry and the electoral vulnerability of Democratic incumbents of the purple or red state who do not want the image of partisan liberals. It also reflects something that has become rare on Capitol Hill: the efforts of Banking Committee Chairman Mike Crapo (R) to include the Democrats and follow a "regular order" in drafting the bill.

Now the legislative action is transferred to the House, where it can be transmitted only to the Republican votes. If Hensarling and his colleagues attempt more aggressive deregulation, it could jeopardize the chances of compromise in the Senate. This is because Senate leaders need Democrats to pbad an obstruction-proof law, and they are unlikely to support further deregulation.

So, even if a new legislation is finally approved, it seems that the central elements of Dodd-Frank are overseeing the larger banks, and requirements for systemically important banks to have "wills in life" to prepare them for a possible liquidation in case they fail.

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In the end, Klein says that important as the details of the law are, another key is the tone set by the first-line regulators, those in agencies such as the Treasury and the Federal Reserve in charge of monitoring compliance and potential Emergencies Risks For now, everyone, from Congress to Trump administration officials and the banks themselves, are generally pushing in the direction of a lighter touch.

"The legal framework can be strong, but if the regulators do not act, the system can encounter significant problems," says Klein.

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