A banking bill that Mike Crapo put under his wing in the Senate has moved ahead again, coming closer to becoming a reality during the Trump administration. The bill allows for several different outcomes that adjust the way that banks do business with the Federal Reserve so that different sizes of bank will be able to compete better.
Here are a couple of the features of the bill that Senator Mike Crapo has put forward:
The mid-cap maker feature:
Although the Federal Reserve is quite busy, they didn’t fail on bank oversight during the financial crisis a decade ago. Instead, their watchfulness created conditions that allowed them to suggest triage methods based on portfolios. At the same time, some politicians noticed that the scrutiny that was placed upon small banks which did not fail or have the same crisis conditions as large banks put an unfair economic burden on those banks, making it harder for them to grow rapidly.
So the bill rewards smaller banks by removing some of the regulation that has been in place. That will give banks that have 50 billion in assets up to 250 billion in assets the ability to operate without the same type of close supervision that they used to have. The removal of regulation not only makes their operating costs lower, it should also make regional banks more attractive as investment targets and vehicles for funds that want to create a larger banking entity- maybe even a national one.
The custodian is a genius feature:
Another basic complaint that some politicians have had is that growth can be stifled for banks because the asset count that banks have doesn’t always get to be completely used to make loans against. This has caused some trouble in the past because large institutions have eschewed investing in certain areas because the incentive has not been that great. The new banking bill therefore creates a class of institution that can in fact make a new class of municipal bond assets that can be valued- and then actually can be sold when there is a financial problem, making the institution much more flexible than it has been in the past. The winners here are very large banks that will be able to focus even more on purchasing and holding municipal bonds than they have before.
Interestingly enough, just as the provision to create larger banks from smaller ones by removing regulation for small, regional banks, this provision provides incentive solely to the largest financial institutions. If your bank is not one of two or three banks that currently meet the standards that the bill is setting, you will have to move into the market and expand operations in a large way in order to qualify.
The new banking bill isn’t a comprehensive overhaul of the banking system. At the same time, it does put provisions in that deal with realities that have impeded growth within the banking sector for the past several years.