As Trump-appointed regulators loosen bank rules, newly empowered House Democrats push back

At the first hearing of the House Financial Services Committee since the midterm elections, Rep. Maxine Waters didn’t waste any time Wednesday in warning a top bank regulator that things will change under the incoming House Democratic majority.

“Make no mistake … the days of this committee weakening regulations and putting our economy at risk of another financial crisis will come to an end,” said the Los Angeles Democrat, who is expected to become chairwoman of the committee when the new Congress is seated in January.

Regulators appointed by President Trump, urged on by congressional Republicans, have been loosening the tough rules on banks and other financial firms put in place after the 2008 financial crisis.

The Federal Reserve took a major step last month when it proposed reducing the amount of capital many large banks are required to hold as a buffer against a crisis. And the Fed’s top regulation official, Randal Quarles, last week outlined plans to revise annual stress tests to make their methodology more transparent — and easier for the banks to pass.

Democrats have expressed concerns that the rollbacks are risky. And after last week’s elections, they’ll be able to use their new majority on the Financial Services Committee to block new deregulation legislation and pressure regulators not to go too far in interpreting existing laws.

They previewed those capabilities Wednesday as Quarles, the Fed’s vice chairman for bank supervision, appeared before the committee to deliver his twice-annual report on financial regulation efforts.

But the limits of Democrats’ power were also evident as Quarles parried their criticisms — and will face no significant ramifications other than occasional public tongue-lashings if he fails to comply, given the central bank’s autonomy.

“It’s good that the banks are working and the economy is humming,” Rep. Carolyn Maloney (D-N.Y.) told him. “But I’m very concerned about any effort to roll back the stress tests that in many ways has guaranteed this financial success and the safety and soundness of the financial system.”

“We are not seeking to relax or impair the resiliency of the system,” Quarles responded.

Quarles, nominated to the Fed by Trump last year, also got pressure in the other direction from Republicans who said he should be more aggressive in scaling back rules put in place by the landmark 2010 Dodd-Frank law.

Rep. Jeb Hensarling (R-Texas), the committee chairman who is stepping down from Congress at the end of the year, said the Fed’s recent deregulation proposals “do not yet represent success” and that he hoped the changes would go further.

“If they represent the Fed’s final offerings, it’s pretty thin gruel,” he said.

Hensarling opened the hearing by congratulating Democrats on their election victory but warned “our side will not acquiesce to your agenda.”

Waters, the committee’s top Democrat, is widely expected to be chosen by her Democratic colleagues as chairwoman. She has outlined an agenda that would zero in on two troubled big banks, Wells Fargo & Co. and Deutsche Bank, as well as push back on the Trump administration’s deregulation efforts.

Trump and Republicans, urged on by bank lobbyists, have been setting the agenda since January 2017. They have focused on rolling back parts of Dodd-Frank, which they were unable to do in any significant way while President Obama was in office.

Trump has nominated financial regulators who he believes will ease regulations. Three of the four board members of the Fed, which has expanded regulatory authority under Dodd-Frank, were nominated by Trump.

In some rare bipartisanship, Congress this spring enacted legislation that scales back some Dodd-Frank rules. The changes focused relief on small and medium-size banks that had complained they were unfairly burdened with new regulations. The Fed also received discretion to more broadly tailor regulations based on a bank’s size and other factors.

The new law freed about two dozen banks with assets of as much as $250 billion from Dodd-Frank’s mandatory stricter regulatory oversight, which includes rigorous annual stress tests. The threshold for that oversight had been $50 billion in assets.

On Oct. 31, the Fed unveiled a proposal in response to the law that would divide banks with more than $100 billion in assets into four categories based on size and risk factors.

Wells Fargo, JPMorgan Chase & Co. and the six other largest banks would not get any significant relief. But large regional banks, such as U.S. Bancorp, Capital One Financial Corp. and American Express Co., would either be exempted from or see significant reductions in requirements for the amount of capital they must hold and how much must be in liquid assets that could easily be sold for cash in a crisis.

Fed Gov. Lael Brainard, the only Democrat remaining on the board, was the lone vote against the proposal. She said she was concerned that “the proposals go beyond the statutory mandate” and “increased risk to financial stability and the taxpayer.”

Democrats on the Financial Services Committee echoed those concerns Wednesday.

“As we saw in the last crisis, it is the average, hardworking Americans that will suffer the consequences if Washington deregulates Wall Street megabanks again,” Waters told Quarles.

Rep. David Scott (D-Ga.) said the stress tests begun by the Fed in 2009 are “very important for the financial stability of our country.”

The tests put bank finances through recession scenarios to determine whether they would be able to withstand them. Scott said he was worried that the proposal to provide banks with more details about the tests would make them less effective.

“This sounds very much like you’re going to be giving away the exact questions on the stress tests ahead of time,” he told Quarles.

Quarles responded that the information to banks would not have “deep precision” and would focus on the models the Fed was using instead of the exact scenarios to be tested.

“The scenarios are more akin to the test and models akin to the textbook,” he said.

Quarles also defended the proposed changes in capital and liquidity rules for larger banks. He noted that Dodd-Frank significantly increased those requirements.

“There’s been a huge increase in liquidity in the system since the crisis, trillions of dollars,” he said. “This is a small reduction.”

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