The Senate Just Passed a Big Rollback of Dodd-Frank

The legislation prompted a fierce debate between the moderate and progressive wings of the Democratic Party.
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The Charging Bull stands in New York City's Financial District.

The Charging Bull stands in New York City's Financial District.

Late Wednesday night, the Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act on a 67-to-31 vote. No Republican Senators voted against the legislation, and 16 Democrats and one Independent voted for it.

The legislation would roll back several portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in 2010 in the wake of the financial meltdown of 2008. Most notably, the new legislation would raise the threshold at which banks are subject to particularly strict oversight and regulation.

Under Dodd-Frank, any bank with assets greater than $50 billion is subject to more stringent oversight and regulation. The system was created to prevent a 2008-like situation in which extremely large (i.e. "too big to fail") banks engaged in behaviors that put both themselves at risk of failing and, due to their size, threatened the stability of the entire global financial system. The legislation the Senate passed on Wednesday would raise that threshold to $250 billion, a change that affects 25 of the 38 largest banks in the country.

The Economic Growth, Regulatory Relief, and Consumer Protection Act makes a number of other small changes to Dodd-Frank and includes some new protections for consumers. It exempts small banks with assets under $10 billion and limited trading assets from the Volcker rule, a part of Dodd-Frank which prohibits banks from engaging in the kinds of risky, speculative trading that contributed to the 2008 crisis. The act also exempts smaller mortgage lenders from a requirement that they collect and report additional data on borrowers and their loans; this was meant to help federal officials assess if lenders were engaging in discriminatory practices. This exemption provision has provoked alarm among fair housing advocates.

The de-regulatory legislation has prompted a fierce debate between the moderate and progressive wings of the Democratic Party. The 16 Democratic senators who voted in favor of the legislation almost all hail from less liberal states, and many are facing difficult re-election campaigns this year. They, along with the bill's Republican supporters, argue that the bill provides much-needed relief for small community banks and credit unions struggling under the weight of Dodd-Frank's reforms.

The progressive wing of the party, including many of those viewed as frontrunners for the presidential nomination in 2020, argues the legislation will put the country at risk for another disastrous financial collapse. Senator Elizabeth Warren (D-Massachusetts) appeared on a number of news shows over the weekend to blast Democrats voting in favor of the legislation. In an appearance on Meet the Press, Warren said she didn't "understand how anybody in the United States Senate votes for a bill that's going to increase the likelihood of taxpayer bailouts."

A branch of the Coastal Federal Credit Union in Raleigh, North Carolina.

A branch of the Coastal Federal Credit Union in Raleigh, North Carolina.

The truth about the bill's effects likely lies somewhere in between these two poles. Even some of Dodd-Frank's biggest defenders and architects have suggested that the $50 billion oversight threshold may be too low. Barney Frank, the Massachusetts congressman whom the bill is named after, wrote in a recent op-ed for CNBC that the $50 billion threshold "had not been carefully considered." Frank, however, thinks that the right threshold likely lies somewhere between $50 and $250 billion, a view which was recently echoed by Paul Volcker, who suggested a $100 billion threshold.

At the same time, few seem to expect the legislation will dramatically increase the risk of another systemic financial meltdown. (The Congressional Budget Office projects the bill would "slightly" increase the likelihood that a "systematically important financial institution ... will fail or that there will be a financial crisis.")

Nor is it entirely clear that Dodd-Frank is responsible for the kind of damage to community banks and consumers that this bill's advocates claim. As Jordan Weissmann pointed out recently in Slate, community banks are "perfectly profitable" and there's "no sign of a credit shortage in the United States—on Main Street or any other street." Meanwhile, most in the industry cite persistently low interest rates as a bigger barrier to profitability than compliance costs.

The legislation still must pass the House of Representatives, where Republicans are seeking a number of changes.

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