This week, Congress is considering a sweeping and complicated piece of law aimed at helping community and local banks. Its exact provisions are still uncertain, but the law will likely let smaller banks make certain risky investments; exempt certain institutions from a rule that restricts their lending, depending on what they hold in deposits; reduce the number of institutions labeled as systemically important; and put more responsibility on the Federal Reserve and other regulators to intervene in the event of a crisis. The Economic Growth, Regulatory Relief, and Consumer Protection Act is a rare bipartisan effort; given its support in both houses and both parties, its passage is all but certain.
Off of Capitol Hill, the bill’s reception has been mixed. Conservatives largely love it, moderates largely support it, progressives largely hate it, and many left-of-center types argue it is less of a regulatory gutting than they expected from a Republican-dominated Congress. “It’s difficult to categorize this as a pile of horrendous ideas, or as a motherhood-and-apple-pie, just-helping small-community-banks [effort],” said Aaron Klein of the Brookings Institution, who helped author the Dodd-Frank banking legislation of 2010.
Much of the criticism of the bill has focused on the way it might end up reducing the regulatory burden on big banks, not just small ones. Some of the country’s largest, most risk-hungry, and most powerful financial institutions have been on a quiet campaign to loosen regulations, such as one determining how much leverage “custodial banks,” ones that safeguard assets for rich clients and institutional investors, are allowed to have. “In general, I’m against exempting anything from the simple leverage ratio,” Klein told me. “Once you start exempting one bank, where does the logic end?” He expressed concern that exempting institutions from the rule would increase the chance banks would game the regulatory system, and increase systemic risk. Moreover, the bill largely fails to address the most prevalent consumer-protection issues of recent years, namely the widespread fraud at Wells Fargo and the data breaches at Equifax.
Then there are the provisions regarding redlining and discrimination in lending—ones largely overlooked, but potentially important. The legislation in process includes a number of technical changes that stand to put borrowers of color, mobile-home owners, and rural residents at risk. Chief among these is a change letting banks that make fewer than 500 mortgage loans a year report less data to the government on who they lend to and at what rates—data meant to help show whether financial institutions are discriminating against families of color. According to data from the Consumer Financial Protection Bureau, the legislation might exempt four out of every five banks and credit unions.