How Sherrod Brown Would Guide the Senate Banking Panel

WASHINGTON — Sen. Sherrod Brown may give the country's biggest banks heartburn, but there are signs he's positioning himself as an industry ally ahead of a potential bid to run the Banking Committee.

In recent months, the liberal Democrat and vocal "too big to fail" opponent has taken on several efforts that suggest a more pragmatic approach to financial services issues. He's spearheaded a proposal with several Republican lawmakers to tweak capital requirements for insurance companies under the Dodd-Frank Act and raised concerns that some relatively uncomplicated regional banks are being classified as systemically important.

"What he's done extraordinarily well is that he went from being someone the banking industry was probably fearful of, given his populist background, to probably being the preferred Democrat for some banks," said Edward Mills, an analyst at FBR Capital Markets. "He's a strong defender of Dodd-Frank, but also someone who is willing to take an honest look at the potential consequences of the law and to make changes as necessary."

The moves come as the banking panel prepares for new leadership next year, after Chairman Tim Johnson, D-S.D., retires in December. Brown is considered a front-runner to head the committee, despite his relatively junior status, if Democrats manage to hold on to control of the chamber after the November elections.

That's because several lawmakers ahead of him, including Sens. Jack Reed of Rhode Island and Robert Menendez of New Jersey, are said to be intent on running other committees. Sen. Charles Schumer of New York is also a contender to take over the banking panel, though observers have suggested he will likely pass up the opportunity so that he can focus on party leadership.

Brown, who joined the Senate in 2007 after serving 14 years in the House, has been an active member on the Banking Committee. He currently serves as chairman of the financial institutions and consumer protection subcommittee, and has previously indicated that he is interested in running the full committee.

A spokesman for the lawmaker declined to comment for this story, but pointed to the senator's work on legislation to raise capital standards at the largest banks and his efforts to push big banks to divest their physical commodities businesses, among other issues.

More recently, Brown has also taken up several causes more favorable to the financial services industry, including a fix to the Collins amendment of the Dodd-Frank Act that would make clear that the Federal Reserve does not need to apply bank capital standards to systemically important insurers.

He also recently held a subcommittee hearing on whether the $50 billion threshold for systemically important banks is appropriate, a key issue for regional banks that would like to see that number raised to $100 billion or even higher.

Such efforts could help many in the industry see Brown in a more nuanced light ahead of the battle for the chairman role.

"We have heard some Democrats worry that donors in New York so fear Brown that they are pushing for anyone else to get the job. Fund raising is an important job for anyone is leadership, including a committee chairman. So the worries won't be taken lightly," Jaret Seiberg, an analyst at Guggenheim Securities, wrote in a client note earlier this month. "We think this explains what we believe is a deliberate effort by Brown to clarify that he opposes the mega banks, but is supportive of regional banks and other financial firms."

Analysts said Brown's work on some of these more recent issues suggests a willingness to take another look at the financial reform law, potentially opening up a sought-after discussion around regulatory relief for smaller institutions. That would mark a sharp departure from Johnson's leadership, which has centered on protecting Dodd-Frank from any changes.

"No one in their right mind would question Sherrod Brown's progressive track record, which allows him to be a dealmaker on targeted regulatory relief for Dodd-Frank," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.

Brown would also likely find himself in a good bargaining position with Republicans, who have been much more vocal about making changes to the financial reform law.

"The people that really want changes are the ones who have to compromise, so if his negotiating partners, being Republicans, ask for too much, then he can turn around and walk," said Brian Gardner, an analyst at Keefe, Bruyette & Woods. "If such an effort were to fail, then he can blame Republicans for overreaching and being unreasonable."

Still, it's likely too early for Wall Street to rest easy over the prospect of a Brown chairmanship. Observers said the Ohio Democrat is unlikely to abandon his aggressive pressure on the country's megabanks.

Last year, Brown co-sponsored legislation with Sen. David Vitter, R-La., to raise capital standards at the largest banks, and the two continue to warn about the subsidies the big banks receive for their size. Even if he couldn't get legislation passed to censure the largest institutions, he would have the power of the bully pulpit at his disposal.

"Certainly the 'too big to fail' banks would be rather anxious," Gardner said. "I don't think that some of the legislation that Brown has put forward with Vitter on with capital rules can pass the Senate, but it would control the hearing agenda. The emphasis would be on more capital, higher capital and breaking up the big banks."

Depending on how membership of the committee shakes out next year, Brown could even find himself with new allies to bolster his cause. Many of the Republican contenders for the Senate hail from more rural states — if some of them end up on the banking panel, they are likely to share Brown's distrust of the largest institutions.

"Some of the new Republicans could be of the same mind on 'too big to fail,'" said Brandon Barford, a partner at Beacon Policy Advisors. "Brown has shown he's comfortable working with conservatives, even if they reach the same conclusion of a need for further reform from a different perspective."

The biggest question mark under a Brown-led panel, meanwhile, remains the fight over housing finance reform. A bipartisan group of lawmakers on the Banking Committee crafted a landmark bill this term to unwind Fannie Mae and Freddie Mac while preserving a government guarantee for the housing system. The measure failed to advance to the full Senate, and Brown was one of a handful of Democrats who ultimately voted against the legislation, helping to tank its chances of moving forward.

Still, the Ohio Democrat has been relatively quiet on the issue of housing reform, which could give him more latitude if he takes the gavel.

"He's done a really good job of keeping his powder dry on that debate," said Mills.

Brown's most detailed critique of the bill came at the panel markup for the legislation in May, where he warned that the proposal was too complex, failed to require enough capital and didn't provide crucial affordable housing protections.

To be sure, it would be difficult for any chairman of the committee to ignore the government-sponsored enterprises entirely, given that housing finance reform remains the last big unaddressed issue from the financial crisis.

But it's unclear whether Brown would be willing to risk crafting and advancing his own legislation, given the steep uphill battle the last bill faced — despite broad support from some industry groups, the White House and others.

More likely than not, the Ohio lawmaker would focus on holding hearings about the issue, and would perhaps look to the work of Mel Watt, director of the Federal Housing Finance Agency, to expand credit for borrowers and further stabilize the housing system.

"I think he's too shrewd of a politician to lose a year or maybe more on something as potentially fruitless as housing finance reform, given his earlier vote," said Barford. "He's not going to do nothing, but I don't think he'll be as invested, in large part because he's relatively happy with the status quo compared to an unproven alternative."