Don’t be fooled: Dodd-Frank reform won’t help your small local bank

When one thinks of community banks, one thinks of the small bank on Main Street in a smaller city or town where the tellers and bank officers are your neighbors and greet you by name.

The president of the bank is an active and visible member of the community. The bank likely sponsors local activities like a Little League team. Those are the banks that supporters of the Senate deregulations bill, S. 2155, want you to think are helped by this bill, but it’s not really true.

{mosads}First, the biggest beneficiaries of the bill are banks with between $50 billion and $250 billion in assets: the 10th- through the 35th-largest bank. They are not local community banks.

For example, one of the key elements of the Senate bill would be to raise the threshold at which the Fed applies heightened scrutiny to banks with up to $250 billion in assets. It currently is set at $50 billion.

While it might sound like that will benefit hundreds of banks around the country, the numbers tell a different story. The current $50 billion threshold applies to only 35 of the roughly 6,000 banks in the United States.

More than 99 percent of all of the banks in the U.S., including 100 percent of genuine community banks, are not subject to enhanced scrutiny and increased regulation from the Fed. Put differently, S. 2155 deregulates the top 1 percent. 

Second, not even 10 years ago, these banks received more than $2.5 trillion in bailouts from the U.S. government and taxpayers to help keep them from going bankrupt. U.S. banking giants like SunTrust, State Street, Fifth Third and even U.S. subsidiaries of foreign banks, such as Credit Suisse, Barclays and Deutsche Bank, all received huge bailouts from the U.S. government during the financial crisis.

Yes, foreign banks were bailed out by the U.S. as well during the financial crash. For example, Taunus, the U.S. subsidiary of the German global megabank Deutsche Bank, received $354 billion in bailouts from U.S. At the time, Deutsche Bank itself was in severe distress and at risk of failing like Lehman Brothers.

It would not have been able to bailout its U.S. subsidiary on its own. If the U.S. had not bailed out Taunus, then Deutsche Bank would have had to and, being unable, the German government would have had to rescue Deutsche Bank. In effect, U.S. taxpayers were substituted for German taxpayers in bailing out Germany’s biggest banks.

Third, in addition to being bailed out by taxpayers, these big U.S. and foreign banks have something else in common: They’re repeat lawbreakers. Since the crisis, the 26 banks that stand to benefit the most from the Senate bill have been sued or fined by federal regulators more than 193 times and paid penalties and fines in excess of $40 billion. That doesn’t even include the countless private lawsuits and actions against them.

Finally, the bill would inevitably also benefit the U.S. operations of several gigantic foreign banks, putting U.S. taxpayers at risk of having to bailout them out again.

The Fed requires foreign banks with more than $50 billion in U.S. assets to establish an intermediate holding company to ensure that the U.S. operations maintain the same systemic risk and bailout protections as other domestic banks.

If the $50-billion threshold for enhanced Fed supervision is increased to a new threshold of $250 billion, U.S. regulators will almost certainly “harmonize” the rules for international banks with American subsidiaries, despite the fact that many of these banks have global assets that rank them among the largest banks in the world.

Secretary Mncuhin confirmed as much during a recent Senate Banking Committee hearing, testifying that the Trump administration would seek to use the authority given to the Fed under the bill to deregulate these foreign banks. What this means is that U.S. taxpayers will once again be on the hook to bail out foreign banks. 

The biggest beneficiaries of the Senate bill are 26 of the largest banks in the country. And just who are these 26 banks? They are bailout recipients. They are recidivist lawbreakers. And they are foreign-owned banks. They are not community banks. 

Nick Jacobs is communications director at Better Markets, a Washington-based organization that promotes the public interest in financial reform, financial markets and the economy.