Leahy Senate Floor Statement On The Economic Growth, Regulatory Relief, And Consumer Protection Act

Ten years ago this month, we saw the first domino fall toward the worst financial crisis since the Great Depression.  Some of our country’s largest financial institutions were facing capital and liquidity crises, and it became clear that many of the biggest banks would need a massive injection of capital, in the form of a taxpayer bailout, to prevent what then-Chairman Bernanke called the “chaotic unwinding” of financial markets.

The near collapse of the U.S. financial system had a real and lasting impact on the prosperity of the United States, reaching the pocketbooks and kitchen tables of every American family, and the stability of the world’s economy, across all sectors.  We – and I do mean we – you, me and all taxpaying United States citizens footed the bill for the risky and cavalier behavior of our country’s biggest banks, allowed largely by a poorly regulated system that brought our economy to its knees.  American taxpayer dollars propped up our financial system to prevent its catastrophic failure – an economic collapse that would have wrought even more damage and misery on tens of millions of American households.

The crisis clearly exposed deep flaws in our regulatory system, and a serious lack of oversight of the financial sector.  It taught us that looking the other way and trusting the system to check and right itself will always result in a race to the bottom in terms of capitalization, risk-taking, transparency, and, too often, casual lending practices. 

Big banks and their executives took on untold and unnecessary risks, hid their financial wellbeing and at best misinformed their investors and at worst, downright lied.  This behavior was supported and left unchecked by a regulatory regime without the oversight to identify and teeth to prevent rampant risk-taking in the name of short-term profit.

We vowed we would never again put American taxpayers on the hook to bail out big banks. To that end, Congress passed the Dodd-Frank Act, the most sweeping, comprehensive reforms to our financial system since the 1930s.  These changes, including new regulations and enforcement mechanisms, were necessary to prevent the recurrence of the systematic profit-driven actions of bad actors throughout our financial system.  Dodd-Frank required big banks to meet capital requirements, pass stress tests, and make plans for their orderly liquidation in case of failure.  All of these requirements were designed to prevent another taxpayer bailout, and they are working.  By design, these standards are difficult to meet but they have not prevented banks from profiting.  Big banks in fact are thriving.  They continue to protect American taxpayers who are, rightly, wary of the behavior of big banks.  Now is not the time to roll back these protective rules for big banks.  They don’t need it.  No one except these big banks will benefit, and it would all be at the risk of future bailouts.  Without these standards, we will again see bank executives influenced by compensation packages that favor risky short-term profits over sound investments and loan quantity over quality.  If we roll back commonsense oversight of big banks, we should expect banks to take advantage of their newfound flexibility and reintroduce risky practices like failing to ensure they are adequately capitalized and mitigating risk.

Like most sweeping reforms, some pieces of the Dodd-Frank Act had unintended consequences.  We talk a lot about banks that are too big to fail, but not about banks too small to succeed, or perhaps too small to comply with the new regulatory regime.  Authority was granted to new and existing agencies to mandate certain regulatory requirements intended to safeguard our financial system.  Our small community banks and credit unions have done their best to comply with these one-size-fits-all regulations and rules, often to the great detriment to their businesses, their bottom lines, and their relationships with their community and customers.  I’ve heard from community bankers who, instead of focusing on Vermonters’ needs, and tailoring their financial services in the honest and professional way that is a hallmark of doing business in a small community, must spend much of their time crossing Ts, dotting Is, and collecting data for fear of the consequences of minor errors.  That is not how small community bankers should be spending their time and not how they maintain the flexibility necessary to meet the needs of their communities.

Our community banks and credit unions did not cause the financial crisis and yet they are still paying the price for it, and by extension, the consumers they serve.  I am glad that this bill provides some regulatory relief for smaller and community banks.  If regulatory relief for community banks and credit unions were its own bill, we would be lining up to support it – or even more likely, pass it by unanimous consent.

But what started out as an effort to help small community banks has been hijacked by big banks and their supporters in Congress.  I am extremely disappointed that this essential relief has been coupled with some very significant changes to regulations on the biggest banks – banks that took hundreds of billions of dollars in taxpayer bailouts.  This is the handiwork of savvy lobbyists pushing a deregulatory agenda and hiding it behind relief for our community bankers.  They know community banks are the backbone of our communities and that they enjoy the support of their representatives.  It is frustrating that we could not consider, debate, and pass a bill that would responsibly allow community banks to better serve and revert to relationship lending in their communities without revisiting these additional oversight measures on big banks that our constituents demand and deserve.

All told, this bill will substantially deregulate some 25 of the largest 38 banks and will require fewer stress tests which are effective ways to measure a bank’s ability to withstand sudden or prolonged economic downturns.  I do not believe this is an appropriate way to relieve our community banks and credit unions, and I am concerned that instead of safeguarding our economy, this legislation will instead open up our taxpayers to even more risk at the hands of bank executives.  For these reasons, I cannot support the big-bank-protection act that this bill has become.  I am disappointed that instead of passing what we said we wanted -- relief for small banks that are being punished for something they did not cause – this bill will roll back the very rules that hold big banks accountable and that protect our economy and the American people.

To conclude, I ask unanimous consent that an opinion piece by Vermont Law School Professor Jennifer Taub, which appeared online at CNN.com, be included in the Record.   In it, she discusses the troubling flaws of this proposed legislation.  Her words would be instructive to the Senate as we are poised to roll back some of the strongest protections we have against another financial crisis.

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March 5, 2018 

Mitch McConnell’s big gift to the banks

By Jennifer Taub

This month marks the tenth anniversary of the $29 billion US government-backed bailout of Bear Stearns. The collapse of this giant investment bank in March 2008, under the weight of its bad mortgage-linked bets, marked the beginning of the global financial crisis.

To commemorate it, the US Senate plans to deliver a big gift to the banking sector by removing several safeguards for American families put in place after the meltdown.

Tin is the traditional tenth wedding anniversary gift. A bank deregulatory bill on the crisis anniversary is a fitting present from someone with a tin ear.

Senate Majority Leader Mitch McConnell has announced that this week the Senate, rather than respond to the plague of gun violence by considering gun law reforms after the Parkland shooting, will begin debating the rollback of financial reforms.

The bill, S. 2155, would considerably weaken the Dodd-Frank Wall Street Reform and Consumer Protection Act, the law President Barack Obama signed in 2010, which was designed to tame Wall Street, protect consumers and make our financial system less fragile.

Lifting the sensible limits imposed by Dodd-Frank would be a dream come true for the banking sector, but eventually a nightmare for the rest of us. This bill will hurt homeowners and allow giant banks once again to take big risks with taxpayer-backed, FDIC-insured customer deposits.

Who is calling for this bank deregulation? The pressure is not coming from clamoring constituents. Instead, it is the bank lobbyists, outside the public eye, who quietly orchestrated this effort. Acknowledging this provenance, the growing opposition has dubbed S. 2155 "The Bank Lobbyist Act."

To pass it, McConnell needs 60 votes, so he will require more than just his party's support. The bill already has 11 Democratic co-sponsors. Unless the public speaks up, he may get those votes.

Here's why. The bill's sponsors on both sides of the aisle are counting on our fading memories. They think we have forgotten the terrible years after the toxic-mortgaged-backed meltdown, when many millions of families lost their homes to foreclosure. The bill's sponsors believe that the pain previously inflicted upon us by the financial sector is buried in the past. They are wagering that we have forgotten both the 1980s Savings and Loan debacle and its repeat performance in the more recent 2008 global financial crisis.

That is a bad bet. We remember.

We remember that banks and borrowers got into trouble with unaffordable mortgages. Yet this bill would essentially encourage banks with up to $10 billion in assets to once again offer predatory mortgage loans to millions of borrowers. This includes making mortgage loans to homeowners based on their ability to pay just an initial "teaser" rate, not the fully-amortized rate. This puts borrowers at risk of losing their homes if they cannot afford the higher long-term payments. It also puts banks at risk when these loans default.

As Boston College law professor Patricia McCoy detailed in the American Banker, Dodd-Frank "required lenders to first determine that loan applicants are able to repay before making them home mortgages. Lenders who fail to make this assessment can be liable to borrowers." Yet the bill "permits banks with total assets of up to $10 billion ... to make unaffordable mortgages, with no liability to borrowers, so long as the banks hold the loans on their books." She adds that "if the bill becomes law, Congress will excuse over 97% of US banks from having to verify applicants' income, assets and debts for mortgages they keep on their books."

We remember that big banks got taxpayer-funded bailouts. That is why Dodd-Frank automatically subjects bank holding companies with more than $50 billion in assets to enhanced supervision by the Federal Reserve. Yet, under the Bank Lobbyist Act, that threshold would be raised to $250 billion. This is too great a risk. As former Fed lawyer Jeremy Kress explained in The Hill, raising the threshold to $250 billion is "effectively deregulating 25 of the 38 biggest banks in the United States, accounting for nearly one-sixth of the assets in the banking sector." We remember that in 2008, several banks with under $250 billion in assets, including Countrywide, received billions in bailouts during the 2008 crisis. And even before the bailout funding was available, when IndyMac with just $32 billion in assets went bust, it cost the FDIC deposit insurance fund about $9 billion.

We remember that regional and community banks can cause a national meltdown. The bill's proponents are positioning it as harmless regulatory relief for regional and community banks. But we remember that during the savings and loan crisis during the 1980s, risky practices -- including poor real estate loan standards, thin capital, risky assets, and dependence on short-term funding -- led to the collapse of hundreds of savings banks. The resulting S&L bailout cost taxpayers hundreds of billions of dollars. As George Washington University law professor Art Wilmarth explained in the American Banker, "Big regional banks and the largest money center banks have held highly correlated risk exposures during every US banking crisis since 1980. Those correlated exposures resulted from very similar business strategies that many large banks pursued during the boom leading up to each crisis." Yet this new Senate bill would allow regional and community banks to avoid prudential supervision, and also engage in high-risk trading with customer deposits.

We remember the bailout oath of "never again." Upon signing Dodd-Frank, President Obama vowed we would "never again be asked to foot the bill for Wall Street's mistakes," but that "for these new rules to be effective, regulators will have to be vigilant." Yet with President Donald Trump's appointment of Mick Mulvaney to head the Consumer Financial Protection Bureau, the deliberate gutting of consumer protections began.

Now with the "Bank Lobbyist Act," our senators have a choice. Will they pile on with the Trump Team and pummel the already weakened financial reform law into submission? Or will they honor their promises made to the American people and protect us from a future financial meltdown?

Time will tell. We will remember.

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