Dozens of banks received the biggest signal yet that they may soon be freed from some of the most onerous rules put in place after the financial crisis, as lawmakers from both parties agreed to a plan that would enact sweeping changes to current law.
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The bipartisan Senate agreement released Monday would relieve small and regional lenders from a number of restrictions meant to limit the damage firms could cause to the economy in the event of another crisis.
In what would be the biggest step to ease the financial rule book since Republicans took control of Washington, the proposal could cut to 12 from 38 the number of banks subject to heightened Federal Reserve oversight by raising a key regulatory threshold to $250 billion in assets from $50 billion. The legislation also would ease red tape affecting credit unions and community banks, allowing them to lend more, supporters said.
The deal will "significantly improve our financial regulatory framework and foster economic growth by right-sizing regulation," said Senate Banking Committee Chairman Michael Crapo (R., Idaho), who brokered the agreement between Republicans and a group of moderate Democrats.
Monday's deal shows Republicans' determination to ease regulations that they say constrain U.S. economic growth by limiting the capacity of banks and other businesses to serve customers and hire new workers. While it isn't clear that any rule reduction will bolster the economy, efforts to scale back the 2010 Dodd Frank financial overhaul law and other policies amount to a bet that a freer environment will pave the way for increases in investment, spending and hiring.
Analysts said it isn't clear that lending would actually increase, given that demand for commercial loans this year has been weak. But banks that had been avoiding mergers, such as those that didn't want to go over the $50 billion line, could be more inclined to deal-making, said Brian Klock, an analyst at Keefe, Bruyette & Woods.
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The deal could dramatically lighten the regulatory burden on a wide swath of banks from Utah's Zions Bancorporation to M&T Bank Corp. in Buffalo, N.Y. Those banks in recent years have had to submit to detailed financial and risk exams in order to pay dividends to shareholders.
Many banks bristled at this annual "stress test" review done by the Federal Reserve, and some including Zions, Citizens Financial Group Inc., BB&T Corp. and SunTrust Banks Inc., failed the Fed's annual test previously. The bill would lighten their stress-test load.
For stress tests alone, building a system to meet the Fed's expectations could cost firms tens of millions of dollars or more. Liquidity rules governing banks' cash holdings are another expensive regulatory exercise that the legislation could allow the Fed to ease.
Regional banks have said their smaller size and lack of interconnected trading businesses makes it unlikely that their demise could create systemic risk that would threaten the economy as Lehman Brothers' failure did in 2008. Their critics say regional banks can be risky, pointing to the 2008 failure of IndyMac Bank.
The deal marks a setback for regional banks with assets above $250 billion, including U.S. Bancorp and PNC Financial Services Group Inc., which have urged policy makers to do away with asset-size thresholds altogether. They favor allowing regulators to apply rules based on their own judgment of firms' riskiness.
"$50 billion? $250 billion? Why is that number any better than another?" U.S. Bancorp's chief financial officer Terry Dolan said in an October interview. His firm has about $459 billion in assets.
PNC said in a statement Monday it was disappointed in lawmakers' proposal. "As a Main Street Bank, PNC's business model and risk profile are very similar to that of other regional banks, and very different from the systemically important Wall Street banks," it said.
Monday's deal is co-sponsored by nine Republicans, including Tim Scott of South Carolina and Bob Corker of Tennessee, along with nine Democrats, including Joe Donnelly of Indiana and Heidi Heitkamp of North Dakota. That is enough to clear both the banking panel and the full Senate, assuming all Republicans in the chamber support the bill.
In brokering the deal, Mr. Crapo left off key Republican goals such as attacking the Volcker rule, a ban on proprietary trading.
"This is the first proposal that has a legitimate shot at making it to the president's desk," said Milan Dalal, an attorney at lobbying firm Brownstein Hyatt Farber Schreck in Washington and a former aide to Sen. Mark Warner (D., Va.), who backed Monday's deal.
Republicans hold just 52 seats in the Senate and generally need support from at least eight Democrats for legislation to pass a needed 60-vote threshold. The House, also controlled by Republicans, would need to act for the plan to clear Congress.
Liberal Senate Democrats, including Ohio Sen. Sherrod Brown, the top Democrat on the banking panel, attacked the legislation, saying it would do little to help "working families."
Negotiations between Messrs. Brown and Crapo on a similar regulatory rollback broke down last month, prompting Mr. Crapo to seek a deal with moderate Democrats.
Mr. Crapo released a summary of the legislation Monday, without unveiling its text. It appears to send a message that Congress wants regulators to lighten the burden, though regulators still have broad authority to apply tough rules to banks they view as risky.
Regulators could immediately exempt firms with assets between $50 billion and $100 billion from stress tests and other rules that were mandatory under Dodd Frank, according to the summary of the legislation. Banks with between $100 billion and $250 billion in assets could get that treatment after 18 months, though the Fed could exempt them earlier. Banks in the latter group would still have to take periodic stress tests.
Presumably, banks that are no longer subject to stress-testing and other rules would be able to slash their costs, but Evercore ISI analyst John Pancari said he wasn't sure if looser regulation would actually materialize into cost savings. "A lot of the banks view much of the cost that they've spent on that as sunk costs," Mr. Pancari said. "So, for example, if they spent money on the robust monitoring of their risks, they are probably going to keep up what they built."
The effect on each bank would depend on how close it is to the $250 billion threshold, Mr. Pancari said.
The legislation also is expected to include dozens of other provisions, some of which have been previously floated or discussed by lawmakers.
One targets credit bureaus in the wake of the hack of Equifax Inc., according to the summary. It would require credit bureaus to freeze and unfreeze consumers' credit for free once a year.
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(END) Dow Jones Newswires
November 13, 2017 20:03 ET (01:03 GMT)