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Senate Committee Votes to Pass Bill to Help Regional Banks

A Senate committee just voted to advance the Economic Growth, Regulatory Relief, and Consumer Protection Act, according to the Huffington Post.

The purpose of the bill is to reduce the regulatory burden faced by smaller, regional banks and give consumers greater access to money to buy houses. However, according to the Congressional Budget Office (CBO) in their independent analysis of the bill, it would slightly increase the odds of a financial crisis such as happened in 2008.

After the financial crisis, the government passed the Dodd-Frank Act to impose extensive new regulation on banks and the financial industry. One of its provision forces banks to hold more capital relative to its total assets. That limits the ability of banks to become overextended, loaning so much money they don’t have enough cash to meet their own obligations. Dodd-Frank also imposes a higher level of requirements on banks worth $50 billion and over. They are subject to an even higher level of regulatory scrutiny. This includes having “living wills” and running annual “stress tests.” The purpose is to make sure the banks cannot take as many risks as they did leading up too the financial crisis, and they can react effectively if another such crisis occurs.

The Economic Growth, Regulatory Relief, and Consumer Protection Act would reduce the amount of capital smaller banks would be required to have on hand to meet demand. It would also raise the threshold for the higher regulatory scrutiny from $50 billion to $250 billion. That would mean the tighter requirements would apply only to the country’s 13 largest banks.

Backers of the bill say the risk posed to the overall financial system by the smaller, regional banks is negligible. The CBO said passage of the bill would increase the risk banks from $100 billion to $250 billion in size would fail. It cited academic articles estimating that for every 1% decrease in a bank’s mandatory capital-to-asset ratio, the risk of failure increases 5% to 60%.

Meanwhile, these banks cannot serve their customers as well because of the regulations and mandatory capital requirements. Passage of the act would make it easier for consumers to take out mortgages to buy houses. Senator Gary Peters (D-MI) pointed the smaller banks did not cause the financial crisis.