Despite Senate vote, Dodd-Frank reform is far from a done deal

Senate passage Wednesday evening of its version of financial services regulatory reform (S. 2155) hardly ensures a smooth passage to final enactment of long-sought reforms to the Dodd-Frank Act (DFA) that Congress enacted in 2010.

Despite strong support in Congress and in the banking industry for reforming DFA, congressional enactment of DFA reforms and related regulatory reforms may not happen this year despite the Senate action and earlier House passage of DFA reforms spelled out in the CHOICE Act.

{mosads}The risk to enactment lies with reconciling the substantial differences between the two bills in a manner that will attract the support of the nine Senate Democrats and Independents who voted for S. 2155, along with the Senate’s 51 Republicans, to overcome any filibuster that would block the bill.

That compromise language also must be acceptable to enough House Republicans to overcome broad opposition to any compromise by House Democrats.

Further complicating the situation are questions as to what the next step will be: Will House amendments to the Senate bill be rejected by Senate, leading to a conference committee to resolve the differences between the two version of the bill? Or, will representatives of both houses develop a legislative compromise without the House having first voted on the Senate bill?

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) has stated that he is not ready to move forward on the Senate bill as it stands: “We are not rubber-stamping the [Senate] bill. It’s got to be bipartisan and bicameral.”

As long as the House holds to that position, there will be no further action on DFA reform. In the meantime, the House continues to pass relatively narrow bills that potentially could be included in comprehensive financial regulation legislation.

Although it is only the middle of March, the remaining legislative days this year could quickly pass by in what will be a highly contentious election year. Further, the pending legislation will be Rep. Hensarling’s last chance to put his stamp on regulatory reform since he will be retiring at the end of this year.    

This stalemate puts enormous pressure on the Senate’s moderate Democrats, such as Sen. Mark Warner (D-Va.), who voted for the Senate bill, and the more conservative House leadership, especially Speaker Paul Ryan (R-Wis.) and Chairman Hensarling, to negotiate a compromise that will attract the votes of enough moderate Senate Democrats and House Republicans to ensure passage.

Given all the moving parts in both S. 2155 and the CHOICE Act, plus other bills that the House has passed and new financial services issues that are surfacing, the advocates for reforming DFA, or at least tweaking it, face an enormous, time-constrained challenge.

For example, questions have been raised about a provision in the Senate bill that would exempt small lenders from certain mortgage data reporting requirements, easing a regulatory burden for those lenders. Opponents of this provision argue that it would make it easier for small banks to discriminate as mortgage lenders.

At the other end of the size scale, there is a provision in the Senate bill that would benefit three large banks — Bank of New York Mellon, State Street and Northern Trust — by reducing the amount of capital they must hold related to their substantial asset-custody businesses. 

Other large banks, notably JPMorgan Chase and Citigroup, who have less substantial asset-custody businesses, would like that same capital break, too.

If prospects increase for passage this year of legislation affecting not just DFA, but potentially other financial regulatory laws, too, other potential additions to the legislation are likely to emerge, weighing the bill down and decreasing its chances for enactment. All the time and effort invested in the pending bills will have been for naught.

If DFA reform is to be enacted this year, it will take an enormous effort by the key players on the Senate Banking Committee and House Financial Services Committee to cobble together a bill that will attract a sufficient number of votes in both houses and not risk a presidential veto. That is a huge challenge and far from a certainty.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system and the growing federalization of credit risk. Prior articles by Ely on banking issues and cryptocurrencies can be found here.  Follow Bert on Twitter: @BertEly