Reform regulation to let more banks serve Main Street

Since Congress passed the Dodd-Frank Act in 2010, most of the debate about the law’s impact has centered on whether it would end government bailouts of the too-big-to-fail firms that were responsible for the financial crisis of 2008. Republicans and Democrats often disagree about the law’s impact on that issue and about possible changes to the law to address regulation of Wall Street.

But there has been one area of bipartisan agreement: financial regulation should not stifle banks’ ability to deliver credit to small and medium-sized business located on Main Streets in communities all across the U.S. These are the firms that are critical to economic growth and the source of the most of the new job creation in the U.S.

{mosads}Traditional lending institutions should be subject to safety and soundness regulation; they should not be burdened with unnecessary rules that hinder lending. To many Republicans and Democrats, it’s clear that Dodd-Frank unintentionally burdened traditional community, midsize and regional banks. These are the banks that take deposits and make loans in the communities that we represent and we believe that regulations should be based on their business model and risk profile and not on an arbitrary asset threshold in Dodd-Frank that lumps Main Street and Wall Street together.

As the House sponsors of bipartisan legislation to ensure that regulators have the authority to do just that – to regulate banks based on risk, and not just size – we have been heartened to see Senate Banking Chairman Richard Shelby (R-Ala.) propose legislation that would make similar reforms. Like the bill we introduced in March, Shelby’s legislation, which is scheduled for markup in the Senate Banking Committee today, would allow regulators to apply the most stringent regulations to those companies whose business models justify it, while allowing traditional banks that don’t engage in complex and potentially risky activities to focus on serving their customers.

While these new rules cost regional banks billions of dollars in new regulatory compliance costs each year, the more significant impact is the way these enhanced prudential standards limit lending in communities across the country. To meet these standards—again targeted to protect against risky activities not basic commercial and consumer lending—Main Street banks have to hold their capital and not lend it. In Senate Banking Committee testimony in March, the regional banks estimated that without these unnecessary buffers they would be able to lend an additional $250 billion.

Regional and midsize banks operate in all 50 states and serve local communities—and all of our Districts—in more than 30,000 branches and offices. They are an important source of credit to more than five million Main Street businesses—including approximately $600 billion in commercial and industrial loans and another $60 billion in small business loans. These banks also provide financial services to more than half of all U.S. households and extend about $1 billion in consumer and mortgage loans.

We should not hold back economic growth because of a poorly designed systemic risk rule.

All too often, criticism of efforts to alter the SIFI designation process seem rooted in reactions that have nothing to do with the actual facts of these proposals. We’d like to set the record straight: nothing in Shelby’s SIFI proposal, or in the companion legislation we have introduced in the House, would roll back regulations on Wall Street firms. 

Instead, we both propose to correct an accidental outcome of the 2010 law, which designated every bank with over $50 billion in assets for the most stringent set of regulations, no matter their business model, risk profile, or individual characteristics. That arbitrary line, which is based on no financial research or analysis, means that regional banks across the country that do business by taking deposits and making loans are subject to the same enhanced regulations as the complicated firms that trade in derivatives or design complicated instruments.

In the five years since Dodd-Frank was passed, regulators have developed more sophisticated methods for measuring risk that take into account not just size, but also interconnectedness, global activity, complexity, and dominance in certain customer services. After applying those tests, analysts at the Treasury Department’s Office of Financial Research have shown that regional banks, for example, pose virtually no systemic risk to the economy. Forcing more banks to comply with regulations that do nothing to ensure safety and soundness of the financial system has real economic costs.

A number of regulators and former regulators – including Treasury Secretary Jack Lew, Federal Reserve Chair Janet Yellen, Governor Daniel Tarullo and former Chairman Ben Bernanke – have already called for adjusting the law to bring it more in line with economic reality. They join a chorus of many members of Congress and even Barney Frank himself. We agree, and we hope senators from both parties will support Shelby’s proposal later this week.

The debates over Wall Street can wait for another day. It’s time to make reforms that will help the banks that serve Main Street do more to improve our communities.

Luetkemeyer represents Missouri’s 3^rd Congressional District and has served in the House since 2009. He sits on the Financial Services and the Small Business committees. Scott has represented Georgia’s 13^th Congressional District since 2003. He sits on the Agriculture and the Financial Services committees.