What do you do when a common-sense fix to a bad regulation opens a rift between progressives and moderates in the Senate Democratic caucus? Two things — pass the popcorn and keep your mouth shut. A bipartisan bill to counter the backfire on community banks created by Dodd-Frank prompted Elizabeth Warren to openly attack her colleagues. Now Senate Democrats are publicly sniping at each other, and progressive activists have begun targeting vulnerable red-state incumbents, The Hill’s Alexander Bolton reported this morning:
The banking bill, or the Economic Growth, Regulatory Relief and Consumer Protection Act, as it is formally known, differs from last year’s ObamaCare repeal and the tax-cut bill in key ways.
Unlike the GOP health-care and tax-reform efforts of 2017, which were partisan from the start and largely drafted behind closed doors, the banking measure was negotiated with Democrats from its inception and had nine Democrats as original co-sponsors. …
Sen. Claire McCaskill (D-Mo.), who is running for reelection in a state that Trump won by 19 points, expressed during a lunch meeting last week her frustration at liberals for attacking fellow Democrats on the banking bill.
Other centrist Democrats in tough races were irate that Warren called them out in a fundraising email last week that criticized them for supporting what she called the “Bank Lobbyist Act” and highlighted votes in favor of proceeding to the bill.
Dodd-Frank was flawed in many ways, but this was perhaps the most perverse of its errors. Supposedly, one aim of the 2010 bill was to unwind “too big to fail,” but instead it made the problem worse. The legislation burdened smaller banks with so many added compliance costs that they began selling themselves off to larger banks that could handle the economies of scale better. A Harvard University study identified the problem three years ago, and I wrote about it at that time in a column at The Fiscal Times, including the adverse impact that consolidation was having on farmers who typically rely on smaller, local banks:
The impact fell hardest on community banks, which made them less competitive and more likely to be consolidated. “[Larger] banks are better suited to handle heightened regulatory burdens than are smaller banks,” the study notes, “causing the average costs of community banks to be higher.”
The competitive disadvantage is significant. The study quotes testimony before Congress in 2012 from the chair of the Community Bankers Council of the American Bankers Association, William Grant, who said that the average compliance costs for banks in the post-Dodd-Frank world was 12 percent of operating costs. However, for community banks, “[The] cost of regulatory compliance as a share of operating expenses is two-and-a-half times greater for small banks than for large banks.”
As a result, it now drives consolidation in the financial industry at a greater rate than before and during the Great Recession. Since passage of Dodd-Frank, the assets of small community banks have dropped 19 percent. That has had an impact on access to loans, especially in agricultural lending needed by local farmers. While demand has increased for such loans, largest bank lending in this area dropped 9.5 percent, leaving local farmers with fewer and fewer options. “Clearly, consolidation of the banking sector is not driving the largest financial institutions to engage in agricultural lending.”
It’s not just agricultural lending where the impact of regulatory-driven consolidation can be seen. In commercial and industrial lending, the larger banks have seen a boost in market share (although not the top five largest). Community banks have lost 22.5 percent of their market share in this area, with the smaller community banks dropping over 35 percent. Even in individual lending, where community banks should be able to compete on proximity to the borrowers, the larger banks have increased their market share by 36 percent, while community banks of all kinds have retreated by 8 percent — and the smaller community banks have lost 18 percent of the business.
Bloomberg Businessweek noted in 2013 the compliance-cost pressure for consolidation comes not just from the bottom up with Dodd-Frank, but also from the top down. “Crossing the $10 billion threshold subjected the Houston-based bank to a variety of regulatory hurdles under Dodd-Frank,” reported Leslie Picker and Matthew Monks. At the same time, smaller banks feel forced to merge “to swallow the costs of complying with new rules” of Dodd-Frank.
Three years later — with Barack Obama out of office — Congress has finally tried to take some action to halt consolidation and preserve community banks. The conflict, in this case, is how to define one. The bill sets the level for lower regulation at banks below $250 billion in assets, which Warren and progressives claim allows too many banks to avoid Dodd-Frank. Never mind that the same progressives created the problem that had nearly cut the number of community banks in half by 2015 — they want the waivers to only apply to the smallest banks in order to maintain cost and regulatory pressures on everyone else, while the top five banks largely have absorbed both with little problem.
What has the leader of Senate Democrats done to deal with the civil war in his caucus? Hide, mostly:
Democratic sources say that Senate Minority Leader Charles Schumer (D-N.Y.) is staying out of the fracas, wanting to avoid the ire of either side. One Democratic aide said Schumer is staying “generally quiet” during some of the arguments that have taken place in meetings.
That’s a true profile in courage, eh?
This bill is long overdue, and so is relief for the community banks that have managed to remain independent this long. This should have been addressed in 2015 when the Harvard study made the problem obvious, and the bipartisan nature of the fix makes it even more compelling. But one has to suspect that Mitch McConnell knew what he was doing when he steered this around to the top of the legislative pile as the midterm campaigns start rolling out.