Is Congress Sowing the Seeds of the Next Banking Crisis?

regulation-4-4-18.pngThree weeks ago today, the U.S. Senate passed a bank deregulation bill that either provides modest relief to one of the country’s most heavily regulated and scrutinized industries—or sows the seeds of our next great banking crisis.

Sponsored by Sen. Mike Crapo (R-Idaho), who chairs the Senate Banking Committee, the measure passed by a 67-31 vote that included 15 Democrats and Sen. Angus King, an independent from Maine. The Crapo bill has often been described in the media as a “roll back” of the landmark Dodd-Frank Act of 2010. Passed after the financial crisis—which is approaching its 10-year anniversary, if one considers the Sept. 15, 2008 bankruptcy filing by the investment bank Lehman Brothers to mark the beginning of the crisis—Dodd-Frank imposed a number of new regulatory restrictions and requirements on the entire banking industry, particularly big banks.

The Crapo bill is hardly the full-throated repudiation of Dodd-Frank that some of its harshest critics would suggest. It’s most significant provision raises the designation threshold for Systemically Important Financial Institutions, or SIFIs as they are usually called, from $50 billion to $250 billion. Banks below the $250 billion threshold would no longer be subject to the same level of heightened supervision by the Federal Reserve that would remain in effect for banks above the $250 billion threshold, although the Federal Reserve would have the authority to designate any bank a SIFI if it believes that is warranted.

The bill would also exempt banks with $10 billion in assets or less from Dodd-Frank’s restrictions on proprietary trading (through the so-called Volcker Rule), which was aimed primarily at the practices of the big banks. The complicated capital framework for community banks would be replaced by a simplified leverage ratio that would still leave them well capitalized. And the bill eases a number of residential mortgage loan requirements that have made it difficult for smaller banks to compete in that market.

These changes are hardly an evisceration of Dodd-Frank—particularly when compared to a more ambitious bank deregulation bill that passed in the House of Representatives last year, but has found little bipartisan support in the Senate. Still, progressive Democrats like Sen. Elizabeth Warren (D-Massachusetts) and consumer advocacy groups like Public Citizen would have you believe that the next banking crisis is lurking around the corner if the Crapo bill ever becomes law.

Warren, a strident critic of big banks, says none of her constituents are clamoring for bank deregulation. “[N]ot one single person at any of my town halls, or meetings … or picking up pizza at Armando’s, asked for Congress to work on rolling back the rules on some of the biggest banks in the country so they’ll have a chance to crash the economy again,” she said in an interview with the website Politico. Public Citizen sent Crapo a letter in November of last year that laid out its broad objections to his bill, saying it would “take us in the wrong direction by removing important safeguards that protect the markets and consumers from some of the nation’s largest banks.”

I don’t think there is any question that the banking industry today is stronger than before the crisis. Banks are more highly capitalized, and while the Senate bill would relax oversight for banks that would no longer be designated as SIFIs, it is indisputable that the entire industry is more closely supervised than prior to the crisis. And this is important: The federal banking regulators retain their full authority to crack down on any bank they believe is operating in an unsafe or unsound manner. I think most of the Crapo bill’s changes make sense and won’t lead to a weakening of the industry’s safety and soundness.

Some of the fierce opposition from progressives like Warren is also a sign that even after nearly a decade the financial crisis still has a firm grip on our politics. “We continue to live in a very populist environment—there’s populism on the right and populism on the left,” says Brian Gardner, the director of Washington research at the investment bank Keefe Bruyette & Woods. “I think some of the lawmakers [like Warren] are playing to their base. I think it’s very good politics for them.”

Indeed, many of the Democrats who voted for the Senate bill are running for reelection this fall in states won by President Donald Trump in 2016, so maybe they were playing to their base as well.

Still, I’m not convinced that Warren, who is probably the banking industry’s harshest critic in Congress, is merely being political. Right or wrong, I think she truly believes that big banks pose a deadly threat to the economy and any loosening of their oversight will sow the seeds of another crisis. For Warren, nearly 10 years later, it’s still a matter of principle more than politics.


Jack Milligan


Jack Milligan is editor-at-large of Bank Director magazine, a position to which he brings over 40 years of experience in financial journalism organizations. Mr. Milligan directs Bank Director’s editorial coverage and leads its director training efforts. He has a master’s degree in Journalism from The Ohio State University.