These Moderate Democrats Could Make or Break Reg Relief

WASHINGTON — Both parties have now put their stamps on competing regulatory relief bills, but the success or failure of reform legislation this year still likely rests in the hands of moderate Democrats.

House and Senate Democrats on Wednesday unanimously stood behind a narrow relief proposal for community banks, a far cry from the more ambitious set of reforms from Senate Banking Committee Chairman Richard Shelby, R-Ala. Democrats say their more barebones bill would ensure passage of industry-supported changes with bipartisan support before lawmakers move to debate more contentious reforms.

Despite the renewed focus on Democratic efforts this week, analysts remain wary that lawmakers will be able to negotiate a bipartisan deal in coming months. But if Republicans are to be successful, they will still need to pick off at least a handful of Democrats to avoid a filibuster on the Senate floor.

"It's difficult to attack the Democratic legislation head on, given that literally everything in those pages is mutually agreed upon," said Isaac Boltansky, an analyst at Compass Point Research & Trading. "So instead, Republicans will have to focus on individual members in order to gain support — it's still all about the moderate Democrats."

The Democrats' bill is notable for the fact that it marks the first time so many in the party have agreed on changes to the Dodd-Frank Act, even limited ones. The legislative proposal has support from every Democratic member on the House and Senate banking panels. But the question remains whether moderate Democrats who would like reforms to go further will sit down with Republicans or remain aligned with the Democratic effort.

Mark Calabria, director of financial regulation studies at the Cato Institute and a former Shelby staffer, said he is predicting the Shelby bill will be brought to the Senate floor in coming months, perhaps even after further negotiations with Democrats.

"I think there's a good chance Shelby's bill will be taken to the floor at some point, and the question will be, are the moderate Democrats still going to oppose it?" he said.

Moderate Democrats potentially getting more notice include Sen. Jon Tester, D-Mont., who has long pushed for relief for smaller banks, as well as Sen. Heidi Heitkamp, D-N.D. Another moderate, Sen. Joe Donnelly, D-Ind., was the only member of his party to join Republicans in supporting certain amendments to Shelby's bill. Both Heitkamp and Donnelly are relative newcomers to the committee. (The bill passed the committee along partisan lines.)

During the committee's vote Donnelly said that while he did not support the entire GOP plan, Shelby's legislation did include attractive provisions. "In the chairman's bill there are a number of additional things that I think could work, but there are things in there that do not work," he said.

Meanwhile, the Democrats' bill laid out some of the least contentious relief proposals supported by both sides.

The banking industry has been largely supportive of the Shelby legislation so far, which offers numerous changes for community and regional banks, including a provision to alter a key $50 billion Dodd-Frank threshold. The proposal would also drive reforms at the Federal Reserve Board and the Financial Stability Oversight Council.

By contrast, the Democratic alternative focuses on a much narrower slate of changes for the smallest community banks and credit unions, including provisions to tweak the exam schedule for banks under $1 billion of assets and to codify renter protections when a property is put into foreclosure.

"Let's pass the things around which we have consensus, then let's look at some of the other issues" including changes to the Fed and FSOC, and the designation of "systemically important financial institutions," Sen. Sherrod Brown, the Banking Committee's ranking Democrat, said at a press briefing.

It is still unclear whether, or to what extent, bipartisan negotiations will ever truly get off the ground, despite months of hearings and discussions on regulatory relief in the Banking Committee.

Banking industry officials said that while the Democrats' plan does not go far enough, they are still hopeful that it will be the start of further negotiations toward a broader package that can successfully be signed into law.

"While all efforts to assist banks better serve their customers are helpful, the bill proposed this week is short on content and is far from comprehensive," said James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association. "If this is the measure that helps bring everyone to the table that would be great. Hopefully there will be more on the menu."

Camden Fine, president and chief executive of the Independent Community Bankers of America, added that "both sides are making an effort to find common ground."

"Democrats and Republicans have repeatedly stated that they support strong, comprehensive regulatory relief for community banks, and both sides have stated their positions. Now it is time for them to come together and pass a good regulatory relief bill," he said.

Analysts noted that the Democratic strategy is first and foremost about messaging. After years of debate over relief for community banks, lawmakers on both sides of the aisle need to be able to point to a tangible proposal rather than simply arguing against the other side's approach.

"As much as the banking industry will have frustrations" with the Democrats' approach, "it's at least something," said Edward Mills, an analyst at FBR Capital Markets. "It allows individual members to say, 'We're trying; there are parts of Dodd-Frank that we're willing to discuss.'"

If negotiations on a bipartisan plan fail to pick up steam, the alternative for Shelby at that point could be even less palatable for Democrats. The chairman has already threatened to use the appropriations process — which could force a full Senate vote on banking provisions as part of an omnibus legislative package — to move on reforms that fail to make it through regular order.

"If Republicans were to put measures in an appropriations bill and jam it, they're going to jam stuff Democrats won't like," Calabria said. "The real process would be, let's jam the stuff we don't agree on into appropriations and then maybe vote on the stuff we agree on later."