Tester caves, or maybe not, on banking bill


Martin Kidston/Missoula Current

Sen. Jon Tester, center, takes notes during a town-hall meeting in Missoula.

Feeling the pressure from Republican challengers, U.S. Sen. Jon Tester, D-Mont., has rolled over and endorsed a bill to unravel protections passed in the wake of the 2008 financial crisis.

Or, in the alternative:

Showing his independence from the left wing of his own party, U.S. Sen Jon Tester, D-Mont., has bravely stood up for small businesses in Montana and for the banks they depend upon.

I just spent a big part of an otherwise lovely weekend trying to figure out which of those scenarios might be true. My firm conclusion: It’s hard to tell.

Tester helped write and is cosponsoring the Economic Growth, Regulatory Relief and Consumer Protection Act, which would relax provisions of Dodd-Frank, the bill passed after the economy crashed and nearly burned in 2008. Amendments are still under consideration, but the bill is expected to pass the Senate and go to the House this week.


David Crisp

Since the 2008 crisis, Tester said in a news release, “regulations meant for the big guys have been trickling down to local lenders in Montana costing them time and a lot of money.”

As evidence for his claim, Tester said the 72 chartered banks in Montana before the 2008 crisis have shrunk to 49 today. He cites information from the U.S. Chamber of Commerce that the number of small-business loans has fallen 41 percent since 2008.

Those numbers are accurate, or close to it, as best I can tell. But as usual, they don’t tell the whole story.

For one thing, the number of small community banks was declining for a long time before Dodd-Frank passed. The United States had more than 17,000 community banks as recently as 1984. By 2004, well before Dodd-Frank was enacted, the number had fallen just about in half. Declines have continued since then at about the same rate.

For another thing, community banks are actually doing pretty well. According to the Federal Deposit Insurance Corp., earnings at the nation’s 5,294 remaining community banks increased 9.4 percent in the third quarter of 2017, a $513 million increase. Community banks make only 11 percent of all loans, but they make 43 percent of small-business loans, and borrowers report the greatest satisfaction with community banks.

Still, the number of loans has declined, and increased federal regulation is one of the factors, according to a report by the respected Economist. Other reasons include increased consolidation in the banking industry, a general decline in rural economies, staffing problems and a shortage of qualified loan applicants. Some evidence suggests that small-business lending began declining in 2006, before Dodd-Frank.

No doubt, small banks can use all the help they can get. Even U.S. Sen. Elizabeth Warren, D-Mass., the most outspoken opponent of the new bill, said on television that if all it did was help small banks, she would vote for it, too. No less a figure than former U.S. Rep. Barney Frank, D-Mass. and the “Frank” in Dodd-Frank, said Monday on Vice News that the bill would leave 95 percent of Dodd-Frank intact, and that he would not like to see any Democrats lose their seats over the proposed changes.

Both Frank and Warren object to some changes the bill would make. For example, it would raise the level at which more stringent government controls kick in from $50 billion in assets to $250 billion.

That would exempt 25 of the 40 largest U.S. banks from more stringent requirements, Warren said. Other critics fear that provisions in the bill would exempt even more large banks from Dodd-Frank requirements and that passage of the bill actually would increase the rate at which banks are consolidating and small banks are disappearing.

Jeffrey N. Gordon, Richman professor of law at Columbia Law School, said the bill would produce a “race-to-the-bottom dynamic that will dramatically increase the chance of another financial crisis.”

The Congressional Budget Office estimates the bill would add $671 million to the federal deficit by 2027 and give us a “slightly greater” chance of another financial crisis.

Still other critics complain that the bill eases reporting requirements that help determine whether lenders are using racially discriminatory practices. Banks reply that their lending decisions have nothing do with race, a claim that would carry more weight if there were not a long history of redlining and overt discrimination in lending practices.

A report by the Center for Investigative Reporting in February examined 31 million records in 61 metropolitan areas and found that African Americans and Latinos are routinely denied mortgage loans at disproportionate rates, even when income, loan amount and neighborhood are taken into account.

Phil Angelides, who was chairman of the Financial Crisis Inquiry Commission, which looked into causes of the 2008 financial collapse, noted that the crisis cost more than 8 million jobs and wiped out nearly $11 trillion in household wealth. His conclusion: “Regulators and policymakers ignored widespread warnings about mounting risks as bank executives recklessly pursued illusory short-term profits to reap huge bonuses while driving their firms, and the financial system, over the cliff.”

The bill Tester favors would return us to those days, he said: “Without any compelling public policy rationale – other than the deceptive guise of aiding regional and community banks – this bill now seeks to undo key bulwarks of public protection designed to avert future crises. Indeed, its provisions would put us on the road to re-creating conditions that the FCIC concluded led to the 2008 crisis.”

The Brookings Institution laid out three reasons to support the bill and three to oppose it. Among the good reasons: It has gone through regular order, unlike the abortive attempt to repeal the Affordable Care Act, and it has bipartisan support from perhaps all Senate Republicans and two dozen Democratic senators, many of whom, like Tester, face tough re-election challenges.

Among the bad reasons: This will not be the last attempt to roll back Dodd-Frank. Much worse may be on the way.

Tester remains adamant that the good outweighs the bad. “This bill will spur economic growth, increase access to capital, protect consumers, and cut red tape on Main Street in Montana and across rural America,” he said.

He did not need to add that supporting anything Elizabeth Warren opposes is unlikely to hurt him in a Montana election.

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