Elizabeth Warren: Don't Make Bank Deregulation Bill Worse

(Bloomberg View) -- The bank-deregulation bill that recently passed the U.S. Senate threatens the financial system and undermines consumer protections -- and it could get even worse as it moves through the House of Representatives.      

The Senate bill claims to solve a problem -- one that actually doesn’t exist. Bank lobbyists declare that broad deregulation is needed to spur growth and lending, but banks of all sizes are already making record profits and consumer and small business lending is robust.       

Meanwhile, the Senate bill poses real risk to the economy. Despite being sold as a bill for small banks, it includes three big benefits for the largest Wall Street banks. It empowers these banks to sue the Federal Reserve if they think the rules are too tough, which financial regulatory experts say “will produce a race-to-the-bottom dynamic that will dramatically increase the chance of another financial crisis.” It opens the door for banks like JPMorgan Chase & Co. and Citigroup Inc. to hold significantly less capital than they do now. And it weakens a requirement that big Wall Street banks hold enough liquid assets to withstand a financial panic. 

Former bank regulators, both Democratic and Republican, oppose these changes because they increase the risk of another crisis. And the changes are significant enough that even skeptics of bank regulation are concerned. The Bloomberg View editorial board wrote that that bill “chip[s] away at the bedrock of financial resilience -- the equity capital that allows banks to absorb losses and keep on lending in bad times,” and warned that this “could prove very costly the next time a crisis hits.” Similarly, the Wall Street Journal editorial board worried that the bill includes “a couple of provisions that ease capital and liquidity standards for the giants [that] will make the financial system more vulnerable in a panic.”

Beyond rollbacks for the biggest Wall Street banks, the bill also deregulates the next tier of banks -- the 25 banks with between $50 billion and $250 billion in assets. These are not community banks. They are huge banks in their own right, and they collectively received almost $50 billion in taxpayer bailout money in the 2008 crisis. Banks of this size can threaten the financial system, as shown by the central role Countrywide Financial Corp. -- a $200 billion bank -- played in the build-up to the crash. According to the nonpartisan Congressional Budget Office, the bill frees these banks from additional federal oversight and increases the chances of another taxpayer bailout.   

The bill also undermines critical consumer and civil-rights protections. It guts new rules that protect people who buy mobile homes, exposing working families to new costs and fees. And despite damning new evidence of widespread racial discrimination in the housing market, the bill exempts 85 percent of banks from new data-reporting requirements that are integral to exposing and eliminating that discrimination.    

Unfortunately, the House of Representatives is poised to make the Senate bill even more dangerous. Jeb Hensarling, the Republican chairman of the House Financial Services Committee, has already announced that he will not support the bill unless it includes dozens of additional industry favors. House Speaker Paul Ryan has endorsed Hensarling’s position, which means the House won't pass the Senate bill until Hensarling’s wish-list is tacked onto it. 

What’s on that list? A provision that would likely exempt even more big banks -- including those with almost a half-trillion dollars in assets -- from stricter federal oversight. A provision that weakens stress-test requirements for the country’s biggest banks. A section that repeals existing protections to help prevent borrowers from getting gouged on title-insurance fees when they get a mortgage. And a section to exempt all but a few dozen banks from supervision by the Consumer Financial Protection Bureau. That’s just the beginning.    

Although Senate supporters of the banking bill said they would hold the line against any further industry favors, Hensarling has already succeeded in adding one of the items on his wish-list onto the recent government spending bill. That provision would benefit a handful of big private-equity firms while putting ordinary investors at greater risk.   

If the Senate bill had only been about targeted changes for community banks and credit unions, it could have passed years ago. But the community banks have been held hostage to extract dangerous concessions for the giant banks. As a result, this bill appears to be the latest in a long line of bipartisan deregulatory bills that have helped lead to a financial crisis -- like the bipartisan savings and loan deregulation bill in the 1980s that preceded the S&L crisis, and the bipartisan deregulatory bills in 1999 and 2000 that set the stage for the 2008 crisis.

The Senate banking bill is dangerous enough already. Senate supporters should oppose the addition of even a single new item from Hensarling’s wish-list to the bill – and oppose any effort to add items from this list to other pieces of legislation too. Now is not the time to increase the risk of another financial crisis that will inevitably hit America’s working families hardest.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elizabeth Warren is a Democratic senator from Massachusetts.

To contact the author of this story: Elizabeth Warren at press@warren.senate.gov.

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