New Law Frees Smaller Banks From Strict Federal Regulations

Printer-friendly versionPrinter-friendly version

Last month, the Economic Growth, Regulatory Relief, and Consumer Protection Act was signed into law. The bipartisan legislation rolled back some of the strict regulations on banks established by the 2010 Dodd-Frank law. Under the new law, smaller banks no longer have to comply with rules that many of them had argued were onerous.

The law raises the asset threshold above which banks are subject to stricter oversight from $50 billion to $250 billion. Now, only 12 of the largest U.S. banks are subject to the regulations, freeing smaller banks from the rules, including the fulfillment of a stress test to demonstrate that the bank could withstand an economic crisis. The law additionally exempts banks with less than $10 billion in assets from the Volcker Rule, which prevented banks from making high-risk, speculative investments. The new exemption thus allows smaller banks to engage in speculative trading. They will also be exempted from requirements to report data on their borrowers.

The bill received support from Republicans and some Democrats, while many of their more liberal counterparts were critical of the law, arguing that the Dodd-Frank regulations are crucial for preventing another economic recession. As reported by Mother Jones, Sen. Elizabeth Warren (D-MA) highlighted the risks associated with rolling back these regulations in a press conference. At that time, she said, “people in this building may forget the devastating impact of the financial crisis 10 years ago — but the American people have not forgotten. The millions of people who lost their homes; the millions of people who lost their jobs; the millions of people who lost their savings — they remember, and they do not want to turn loose the big banks again.”

Supporters of the law, on the other hand, believe that the reforms will prevent a crisis by sustaining regulations for the largest banks while freeing up smaller banks to the benefit of small businesses, which often depend on smaller banks and credit unions for capital. In an opinion piece for The Hill, Alfredo Ortiz, president and CEO of the Job Creators Network, wrote, “While big banks engage in exotic financial instruments, which may exacerbate or even contribute to financial crises, small banks make the vanilla loans that are responsible for, say, the new downtown arenas, restaurants, and sporting goods stores across rural America. Big banks use algorithms to make their lending decisions; small banks depend on personal relationships and a strong handshake to make theirs.”

Back in February, the Small Business Majority (SBM), in its policy agenda, noted that “smart initiatives” to increase access to capital for small businesses included reducing the regulations on small, community banks enacted under Dodd-Frank. SBM did stress that any proposal that lifts regulations for community banks must ensure that regulations for larger banks remain in place.