Last-Minute Scramble in Congress Could Be Good for Banks

WASHINGTON — The financial services industry is poised for several possible legislative wins this week, including a significant change to the Dodd-Frank Act after years of futile attempts to alter the reform law.

The House approved a bill on Wednesday to reauthorize the Terrorism Risk Insurance Act, and is expected to pass a measure this week clarifying the Federal Reserve Board's application of capital standards to insurers.

But in arguably a bigger victory for bankers, lawmakers in both chambers could soon move forward on a $1.1 trillion spending package negotiated Tuesday night that includes a repeal of a key swaps provision of Dodd-Frank.

"We're in a new era as it relates to potential legislative changes to Dodd-Frank," said Edward Mills, a policy analyst at FBR Capital Markets.

The burst of activity comes as lawmakers race to close out the final legislative priorities of the year.

The TRIA vote follows weeks of negotiation between Rep. Jeb Hensarling, R-Texas, chairman of the Financial Services Committee, and Sen. Chuck Schumer, D-N.Y., a top lawmaker in the Senate and member of the Banking Committee. Those talks broke down earlier this week over whether the bill would include additional changes to Dodd-Frank, and the legislation was split off from the larger government-spending package.

The House bill would extend the terrorism risk insurance program, which provides a government backstop in the case of a catastrophic attack, for six years and make several other tweaks to the law, such as doubling the trigger for when the program goes into effect from $100 million to $200 million. The House easily passed the bill late Wednesday, by a vote of 417 to 7.

Still, the fight over the program — which expires at the end of the year — is not yet over, even if the sheer number of House Democratic votes means that it is likely to be ultimately extended.

Democrats have pushed back on Hensarling's addition of an unrelated amendment that would roll back margin requirements for end-users, like manufacturers and utilities, involved in swaps trades, as laid out in Dodd-Frank.

"We're worried that any single senator can block it," Schumer told reporters on Wednesday, adding that a TRIA reauthorization without the end-users provision "has a much better chance."

The White House said it's also "strongly opposed" to inclusion of the measure, according to a Statement of Administrative Policy released Wednesday afternoon, though it did not threaten to veto the bill.

"Broadening Dodd-Frank's statutory exemptions is a complicated issue with serious implications for the health and stability of the nation's financial markets," the statement said.

Hensarling defended the move, saying the measure is not a controversial fix to the financial reform law.

"This is a very technical clarification to what we call the end-user provision, which is perhaps the most expensive and unnecessary regulation that Americans have never heard of," the Texas Republican said in a press release Wednesday.

The financial services chairman also underscored that he kept several unrelated provisions added to the original Senate version of the reauthorization bill, which flew through that chamber over the summer. The legislation included amendments that would require the Federal Reserve Board to have at least one governor with community banking or oversight experience and a measure to create a National Association of Registered Agents and Brokers.

At the same time, a fresh battle is brewing over a major spending deal to fund most of the government through the end of the fiscal year in September.

As of Wednesday afternoon, the so-called "cromnibus" legislation repeals a Dodd-Frank provision that requires some derivatives be "pushed out" out of depository institutions and into bank affiliates.

"We are hopeful that the issue can survive in there, and we are cautiously optimistic that it can survive," said James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association.

But the measure remains controversial, and it's possible it could even derail the whole agreement, slowing Congress' efforts to depart for the year.

"If the cromnibus gets changed, it's because of swap pushouts," said Mills.

Democrats in the House and Senate, along with advocates, railed against the measure on Wednesday, warning that it would significantly weaken the financial reform law.

"The provision inserted into the appropriations bill is a substantive mistake, a terrible violation of the procedure that should be followed on this complex and important subject, and a frightening precedent that provides a road map for further attacks on our protection against financial instability," said former Rep. Barney Frank, a key authors of the law, in a statement.

Some regulators also weighed in. Federal Deposit Insurance Corp. Vice Chairman Tom Hoenig said Section 716 of Dodd-Frank, the part of the law that contains the swaps provision, is critical.

It "is an important step in pushing the trading activity out to where it should be conducted: in the open market, outside of taxpayer-backed commercial banks," Hoenig said in a statement. "It is illogical to repeal the 716 push out requirement."

Separately, the appropriations bill also included a more obscure provision defunding a pilot program that would reduce mortgage insurance premiums for borrowers that attend housing counseling. The spending package specifically bars the Federal Housing Administration's Homeowners Armed with Knowledge Program from being funded.

"The failure to secure funding for the HAWK pilot program will significantly limit the program's operational capacity, which should be viewed as a positive for private mortgage insurers, and as an incremental negative for mortgage originators and lower price-point builders," Isaac Boltansky, an analyst at Compass Point Research, wrote in a note to clients Wednesday.

The House, meanwhile, also passed a standalone bill late Wednesday that would clarify the Federal Reserve's ability to write separate capital standards for systemically important insurers.

The chamber approved a related bill put forward by Hensarling this fall that contained several additional changes to Dodd-Frank, including the end-user provision now attached to TRIA. Lawmakers on Wednesday considered the Senate version of the measure, which cleared the chamber this summer by unanimous consent. The bill will now go to the president's desk to be signed.