Michael Grunwald is a senior staff writer for Politico Magazine.

Nellie Liang spent six years running the Federal Reserve’s financial stability division, which was created after the financial crisis of 2008 to try to prevent another one. So she has paid close attention to the bipartisan legislation the Senate passed this week to loosen some bank regulations. Liberal critics like Elizabeth Warren have savaged the bill as a recipe for the next financial catastrophe, an egregious sellout to Wall Street, and a dramatic rollback of the Dodd-Frank financial reforms.

Liang’s expert analysis is: Meh.


“It’s fine,” said Liang, who is now a senior fellow at the Brookings Institution. “It’s not perfect, but I was afraid they would do something terrible. This definitely preserves the core of the Dodd-Frank protections. I’m not upset about it.”

There are plenty of legitimate questions about why Congress feels the need to provide regulatory relief to banks that are already enjoying record profits, and whether some of the bill’s tweaks to Dodd-Frank will make the financial system less safe. But the doomsday rhetoric about those tweaks—and the political rift they are creating within the Democratic Party—seem extreme compared to their substance. The Senate bill leaves the vast majority of the Dodd-Frank reforms in place, which is why House Republicans who hate Dodd-Frank are already signaling they won’t allow it to become law. The critiques of the bill as a giveaway to Wall Street megabanks seem particularly overblown: Very few of its changes would affect the dozen or so institutions that pose the largest potential dangers to the financial system.

The Senate bill, drafted by Banking Committee Chairman Mike Crapo of Idaho and supported by 16 Democrats, mostly aims to boost smaller “community banks,” which do not tend to create much systemic risk when they fail. The nation’s 6,500 community banks have outsized political clout, and even Senator Warren supports relieving some of their post-crisis regulatory burdens, which they blame for their declining numbers, tepid rural lending, and any other business problems they face.

Still, while the bipartisan Senate bill goes nowhere near as far as a partisan House bill that would gut just about all of Dodd-Frank, it does relax some restrictions on larger regional banks with assets of between $50 billion and $250 billion. A few of the Senate bill’s provisions also introduce ambiguities that the critics believe will enable excessive risk-taking by Wall Street behemoths.

“No, it is not an undoing of Dodd-Frank,” said Michael Barr, who helped craft Dodd-Frank when he was an assistant Treasury secretary under President Obama. “But I think it is a significant mistake.”

Warren thinks the Senate bill is such a significant mistake that she’s called out its Democratic supporters for siding with Wall Street over working people, even though they’ve fought with her against President Donald Trump’s efforts to cut taxes and repeal Obamacare. “Republicans and Democrats came together today to deregulate the big banks and set the stage for another financial crash,” she said Wednesday after the vote. She’s argued that giveaways to megabanks are bad politics as well as bad policy, even for vulnerable Democrats in states that Trump won easily.

Red-state Democrats like Heidi Heitkamp of North Dakota, Jon Tester of Montana and Claire McCaskill of Missouri think that they know their own states better than Warren does. They believe they’ve survived in conservative territory by searching for common ground rather than reflexively opposing anything Republicans want. But they’ll need liberals to turn out to vote for them in November if they want to keep their seats, and that won’t happen if liberals think they’re Wall Street shills. With Trump’s approval ratings sinking and signs of a blue wave spreading, Democratic leaders are afraid this previously obscure finance bill could drive a wedge in the party and damage their chances of taking back the Senate.

The Democrats who support the Senate bill all voted for Dodd-Frank. They argue that bipartisan buy-in for modest adjustments to Obama’s Wall Street reforms would essentially enshrine their permanence, something they’ve tried but failed to do for Obama’s health care law. Trump has vowed to dismantle Dodd-Frank, which would eliminate important post-crisis financial reforms—including rules requiring banks to hold more capital and do less risk-taking with borrowed money; the creation of a financial stability commission that can impose even stricter rules on riskier banks; the creation of a Consumer Financial Protection Bureau to crack down on rip-offs; new rules requiring safer and more transparent trading of complex derivatives; and new powers for government officials to close failing institutions in an orderly way during a crisis. The Senate bill would leave all those reforms virtually untouched, which its Democratic supporters consider a huge victory at a time when Republicans control Washington.

“This is the kind of bipartisan bill the Senate used to do without too much handwringing or pandering on either side,” said one aide to a moderate Democratic senator. “Today, it’s like we’re trying to pass the apocalypse.”



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The most powerful argument against the Senate bill has been that it sets the stage for a reprise of the 2008 meltdown. “It puts us at much greater risk that there will be another crash and another taxpayer bailout,” Warren said on CNN. “And you don’t have to take my word for it. This is what the Congressional Budget Office said.”

Actually, the CBO did not say the legislation would create a “much greater” risk of a crisis. It said the legislation would create a “slightly greater” risk, after noting the risk was already small. And judging from the CBO’s risk analysis, “infinitesimally greater” would have been a more accurate phrase. The agency noted that a crisis could require massive outlays to wind down failed banks, and singled out two provisions it believed would increase that risk. But it deemed the additional risk from those two provisions so minute that it only boosted its cost estimates for those outlays by $73 million over the next decade, or roughly 0.08 percent.

“I worry about memories of the crisis fading, but this would be a very minor step backwards,” one former senior Fed official told me.

The bill’s most controversial provision would increase the threshold from $50 billion to $250 billion for a bank to be considered systemically important. These so-called “too big to fail” banks must undergo mandatory Fed “stress tests” every year, complete a “living will” directing how they could be wound down safely if they failed, and face other stricter safety rules. Just about everyone seems to agree that $50 billion was too low a threshold, inundating banks that don’t really pose systemic risks and don’t really need living wills with heavy compliance costs and headaches.

But many experts believe $250 billion is too high. Countrywide Financial, a mortgage giant whose death spiral nearly sparked a panic in short-term funding markets in 2007, had $200 billion in assets. Banks like SunTrust and BB&T aren’t as big as Bank of America or Wells Fargo, but they’re big enough to slap their names on stadiums and arenas, and critics say they’re big enough to matter in a crisis.

Former Fed governor Sarah Bloom Raskin says public stress tests that model whether potentially systemic banks have enough capital to survive brutal surprises are the best way to detect problems before it’s too late. Less stress testing for safety and soundness, she said, would mean less safety and soundness. “The crisis showed you can have a major hit that wipes out your capital in a nanosecond,” said Raskin, a former Maryland banking commissioner who also served as Obama’s deputy Treasury secretary. “If we can catch something in advance with a stress test, why wouldn’t we keep doing that?”

But the Senate bill does call for periodic stress tests of banks in the $100 billion to $250 billion range, while leaving the timing to the Fed’s discretion. Raskin is skeptical that the stress-testing regime would be as rigorous without a congressional mandate, but Fed chairman Jerome Powell has said he intends to continue “frequent” stress tests of those banks. He endorsed the provision raising the threshold, as did his Obama-appointed predecessor, Janet Yellen. And the original too-big-to-fail regime would remain for the banks above $250 billion.

“The narrative that this bill is a huge thing for Wall Street, so we’re smoking victory cigars, that’s just ridiculous,” said one former government official who now sits on the board of a megabank. “The largest banks think this is mostly irrelevant.”

The bill does include complex and contentious language that eases capital rules for three large “custody” banks—State Street, Northern Trust, and the Bank of New York Mellon—that deposit a lot of super-safe assets with the Fed. There’s a plausible argument that custody banks, which mostly hold securities for clients rather than engage in speculation, should be rewarded rather than penalized for their relatively duller approach to banking. But there’s also a plausible argument that carving out any exceptions to blanket rules specifying how much capital a bank must hold against assets is a dangerous precedent that could later be extended to assets that might not be as safe as they look. The CBO has warned that there’s a 50-50 chance the Fed could end up interpreting the provision to give the same break to giants like Citigroup and JPMorgan Chase that happen to provide some custodial services.

Tim Clark, who recently retired as a deputy director of supervision and regulation at the Fed, said he’s worried that relaxing the rules that govern the very biggest banks could send the financial system down a slippery slope, even though the vast majority of those rules would remain intact. Even at the margins, he doesn’t want Congress to send a message to the Fed to reduce its vigilance. “It appears that there’s a general acceptance of the post-crisis reforms for the largest banks, and that’s good to see,” Clark said. “But these concerns are real.”

The critics have aired other valid concerns, particularly about the potential for more lenient treatment of foreign megabanks with U.S. operations, and a word change they fear will give Wall Street giants an opening to sue the Fed to push for weaker oversight. And they have complained about several issues unrelated to financial stability, including one provision that could expose mobile home buyers to more predatory lending, and another relaxing Dodd-Frank rules combating mortgage discrimination for small banks and credit unions that make fewer than 500 loans a year.

The bill’s supporters say these critiques are overblown as well. The exemption from anti-discrimination disclosure requirements, for example, would affect less than 4 percent of the nation’s mortgage data. And they say there are real benefits to the bill’s efforts to help Main Street banks expand their lending to families and businesses. The FDIC says the number of small banks has dropped by 14 percent since Dodd-Frank passed in 2010; Virginia lost only one community bank during the crisis and Great Recession, but has lost 21 community banks since 2010.

“Virginia’s community banks and credit unions did not cause the financial crisis, and they should not be held back by regulations intended for the big banks,” said Virginia senator Mark Warner, a Democrat who helped with the crafting of Dodd-Frank and now supports the Crapo bill’s adjustments.

It’s not clear how much of the consolidation in the banking industry has been driven by regulation, and how much by low interest rates and natural economies of scale. Former congressman Barney Frank, who worked with former senator Christopher Dodd to write the bill that bears their names, has suggested that the upsides as well as the downsides of the proposed rewrites have been exaggerated.

“This is a lot of yelling about not a lot of change,” one Fed official told me.

The most compelling arguments about the Crapo bill boil down to Democratic politics. For opponents, the bipartisan support for bank deregulations is tarnishing the Democratic brand, rewarding a big-money industry that is already swimming in profits and is poised to reap a new windfall from Trump’s tax cuts. They fear that this will represent the camel’s nose under the tent, a first step toward more aggressive bipartisan attacks on financial restraints.

“You can argue the additional risk is small, but the question you can’t answer is: Why?” said an aide to a liberal Democratic senator. “Banks are making tons of money and doing plenty of lending. What’s the problem you’re trying to solve? ‘It’s not that bad’ is a ridiculous argument for a piece of legislation.”

The bill’s Democratic defenders believe it’s pretty good, especially for a piece of Trump-era legislation. But they believe with more conviction that it’s an excellent way to satisfy a powerful industry’s pent-up demand for deregulation without serious damage to financial oversight. Congress tends to pass only one major banking bill a decade, and the Crapo bill, they argue, is a relatively harmless way to mollify the influential community bankers and signal a willingness to work across the aisle while preserving most of Dodd-Frank as the status quo. They’re incredibly frustrated that arcane disputes over “SIFI’s” and “HMDA” and “FSOC”—don’t ask—could end up fracturing a party that needs unity to fight Trump and take back Congress.

“Are we really going to kill each other over a carve-out in the supplemental leverage ratios for predominantly custodial banks?” an aide to a moderate Senate Democrat complained. “Right now, there are bigger threats to the world.”