mignon clyburn security systems to be able to realize or be able to bring to the ftc. >> watch "the communicators" tonight at eight eastern on c-span2. >> c-span, where history unfolds daily. in 1979, c-span was created as a public service by america's cable-television companies and today we continue to bring you unfiltered coverage of congress, the white house, the supreme court, and public policy events in washington, d.c., and around the country. c-span is brought to you by your cable or satellite provider. >> we are live at the heritage foundation in washington for a conversation on legislation from the senate banking committee

that would undo parts of the dodd-frank financial regulations bill. this is live coverage on c-span2. [inaudible conversations] [inaudible conversations] >> good morning and welcome to the heritage foundation and our louis lehrman auditorium. we welcome those adjoins on our heritage.org website on all of these occasions, those were also joining us on the c-span networks. for those in-house would ask that courtesy check our mobile devices are silenced or turn off. for those watching him under welcome to send questions or comments at any time since e-mailing speaker@heritage.org,

and we of course oppose our program on the heritage homepage following today's presentation. leading our discussion is norbert michel, senior fellow in monetary policy and are institute for economic freedom. traffic studies and writes about financial markets, monetary policy, reform of fannie mae and freddie mac, also focuses on the best way to address difficulties in large financial companies under the rubric of the too big to fail problem. joined heritage in 2013, he was a tenured professor at nicholls state university college of business teaching finance, economics and statistics. he previously served at heritage as our tax policy analyst in our center for data analysis, and he holds a doctorate degree of financial economics from the university of new orleans. please join me in welcoming norbert michel.

[applause] >> thank you, john. joining me here today i'm going to do a short version in the interest of time, a short version of our buyers. joining me from the far left, my far left, is my colleague david burton was a senior fellow and economic policy here at heritage. next to him is paul merski, the group executive vice president of congressional relations and strategy at the icba, independent community bankers association. and then aaron klein, last but not least, , who is a fellow in economics studies and the director of the center on regulation and markets at the brookings institution. thank you all for coming today. we are of course talking about the senate bill that is moving probably this week so let's like we had really good timing, brilliantly planned of course, not lock. i'm going to do a quick overview

of some of the highlights of the main proponents that are in the bill, a couple of the minor things are in the bill and then we'll get our discussion going off of that. one of the main things that is in the senate bill is what is called a community bank leverage ratio come something that the senate does not like to call and offramp, so we'll call it a community bank leverage ratio in deference to the senate. this measure would provide relief from the basel risk weights for banks that are under $10 million in total assets, maybe. i'll get to that in one second. the bill stipulates that the federal ranking regulators will put the actual ratio together but it does specify that has to be tangible equity to total assets and has to be similar between eight and 10%. there some regulatory discretion but it is a little bit oxime, a little pre-defined.

however, if a bank meets this leverage ratio, a bank that is at editing the nss meets this leverage ratio and the regulars determine their risk profile is not okay, then they do not qualify for relief even if they meet the ratio. that risk profile is based on things like off-balance-sheet exposures, derivative exposures and trading assets unlike those at those other factors. that the regulars might come up with. that's one of the main components. another is what we commonly call the sifi threshold. this measure would provide relief from the heightened capital standards that came from section 165 of dodd-frank. it raises the threshold from 50 billion, to 250 billion but not really. it raises the threshold and it still allows any provincial standard to apply to bank holding company with 100 billion in assets.

then on top of that it still gives the federal reserve the authority to tailor regulations, to any bank holding company below $100. this is sort of retired for moving the ratio but we are kind of not, i think. that's how i am this anyway. because they're really not just hard and fast moving the ratio, they are not. another major one, another major caput is the ability, relief to pay qm standard. if a bank less than 10 billion in assets agrees to hold the mortgage on their books as opposed to securitizing it, then they get a qm safe harbor. that is a potentially large one and it's probably, from estimates we've done i think it probably impacts about 25% of the mortgage market. a lot of community banks don't hold, but a lot of them do. it looks like around a quarter of the market.

stress relief, stress test relief, i'm sorry. i need stress relief as you can see. stress test relief, the senator would decrease the mandatory scenarios that have to be reported from three to two and then we change the frequency of company run stress tests for banks that are over 250 billion from annual to periodic, and jerome powell testified that yes, they would, in fact, still be doing this, but i don't think anybody really is exactly what periodic needs but it's not annual. then there's also a component that does the same thing for banks that are over 10 billion in assets for the company run stress test. there's also the volcker rule relief. the extension would be for banks less than 10 billion in assets, and trading assets and liabilities that do not exceed 5% of total assets. it's not a blanket exemption but it is a pretty wide-ranging exemption. all of those are the ones that i

consider to be the main components into notice that $10 billion in asset threshold is in the for most of those. that's actually most banks. most commercial banks by far number around 5000 and we're only talking about a number above that that's in the hundreds. so it is something. it is better than nothing i think it's kind of the way i look at part of this stuff anyway. and then there are a bunch of minor provisions in there, a lot of them overlap with things that been passed in the house either to the choice act or through separate bills. some of them minor ones, just really quickly, short and call reports for banks with less than 5 billion in assets short and call reports in the first and third quarter. there is another provision on the cap market size to provide regulatory parity for national exchanges that extends the blue sky law preemption for securities on all stock exchanges instead of just the

new york stock exchange and the amex. there is a reciprocal deposit bill which i'll talk about in another segment of what we're going to do here. which would no longer or would ensure that reciprocal deposits could no longer be defined as broker deposits, if the amount used does not exceed the lesser of 10 billion or 20% in liabilities. there is a provision that changes the liquidity coverage ratio. it includes general obligation municipals as well as certain municipal revenue bonds as level to be high-quality liquid assets. and then the last what it would change the bank exam frequency again for a few banks. in 2015 this would be for banks under 1 billion in assets, and puts it on 18 month cycle. this would raise the threshold to about $3 billion which would

roughly cover about 400 banks or so. and that's a quick overview of what's in the bill in my minor and major categories. i also have upfront if you didn't see on the way in, on your way out there is an issue brief with the handy chart, and it lists almost everyone of the components that are in there and does a comparison to some of the stuff that is in the house. so that's that segment. what i would like to do next is just go to aaron and saint erin, what are some of the things -- and say, aaron, what are some of the things you like or don't like in the bill? >> thank you and thank you for having me here. i think it's fantastic that you assembled a group of people to have a discussion on this bill that's before the senate floor, that you outline very well. there's a lot of stuff in it. it's a big deal bill, and a

broad level i would say it covers a lot more than just targeted relief for community banks as some of its supporters kind of put it under. and does a lot less, which many of its opponents say does. the truth fulsome in between. i'm going to list out three things i like and three things i don't like in this legislation. i'm picking off the menu you laid out. i want to start with one thing i like, which is this is how a bill kind of is supposed to happen as we learned in school. and this process is very different from the process that's unfortunately dominated what little legislation has gone through. which is kind of closed-door leadership meetings with kind of the cake is baked and it's put forward. the process that went through here, the chairman of the committee and only democrat or ranking member put out a call

for all ideas together. they held multiple public hearings on this. there was substantive negotiations. the two of them couldn't reach an agreement. that's fine. subsequent to that a group of moderate democrats could reach an agreement. one can debate the wisdom of democrats splintering and not having a united front. on the other hand, this is politics, this is the votes. the package is more than the 60 votes necessary to overcome a filibuster. it moved out of committee after a very lengthy markup with 40 and limits debated, called. that's great. have open conversation, have a robust dialogue. put out ideas. one of the biggest mistakes in the dodd-frank process, in my opinion, was when republicans filed 400 and limits and offered zero at the committee market. it was a 20 minute mark of no

because anybody everybody wasne to debate, but when you have a committee markup, the chair says who has an amendment? if nobody brings an amendment, there is a strategy to just not debate. democrats put forward alternatives to parts of the bill they didn't like. there was a debate and the book. i look for to a robust debate on the senate floor. this is the process. it takes me back to bipartisanship and to have an open process. the last -- i thought that was kind of .1. number two, you mentioned it,, section 403 of the bill involves municipal assets in muni debt. let me just take a step back. banks failed because of lack of capital. banks can also fail particularly investment banks can we use the term bank a little too loosely enter nomenclature, because of lack of liquidity or perceived lack of liquidity to the classic run on a bank. whether a bank is solid or not in a a time of crisis is hard o know.

liquidity being a problem regulator said we were going to have liquidity coverage ratios and require banks to hold high-quality liquid assets. something very funny happened, i don't know if you caught it, the problem is that having enough liquidity. the solution became high-quality liquid assets. having an asset of quote-unquote high-quality and having a liquid asset are not necessarily the same thing. but in regulators mines, take less this was an international rule and started internationally, that you became synonymous. in the corporate debt, in the government securities based on high-quality and liquid have a fair amount of synonymous. that relationship breaks down in municipal debt. let me give you an example. if you own a small counties water system, you can have a very high quality assets but it's very illiquid. it infrequently trades. on the other hand, of the top

six municipal debts that traded last year, three were puerto rican. that's not high-quality asset but it is highly liquid. what ended up happening with the regulators said this me anything, this is, kitty, there's no international comparison. we will just kind of ignore it. that's a problem because corporate debt got treated so now you preference of a regulatory perspective one asset class over another. in addition, and then subsequent federal reserve appreciated that, appreciated that there are high-quality in assets, or put a different way than municipal assets of high quality that in times of crisis probably could be sold whether that requires a decent haircut or selling or not, as long as the haircut doesn't change during the crisis. and the federal reserve moved a little bit. the other bank regulators did not. there's a lot of uncertainty in this. i am generally skeptical when congress weighs in at a

regulation at this level to say this asset class qualifies at this level. when you get into the substances of the right move, this is a very high haircut. ironically, if you go back in time and re-rent this test, enron debt what a qualified as high-quality liquid asset well into 2002. the state of new york, or new york revenue bonds dedicated, might not have. congress is wise to put these on parity with corporate debt. the third thing i'd like is section 401 which raises -- i want to get back to not the debate about what number it should be but understand why 50 billion should be changed. you have to understand what the logic was when you put 50 billion dodd-frank, and you had to go back to to ten 2009-n mindset. a different mindset. when a constant boasting structured through the set the banks to stronger regulation,

now called sifi banks, the concept of the time was we were really concern these would be giving the government -- that these banks were too big to filter they would be advantage to be one of these banks. policymakers were concern that markets would interpret that if you are united states bank they government stood behind you. in 2009 where it wasn't clear which banks are stable or not. what's one way to get around this moral hazard argument? let's set the line so low that it's clear if one of the smaller banks failed, the government would not step in and provide extraordinary assistance. so the market wouldn't really know where this extraordinary assistance line was. that was a dominant rationale for setting the $50 billion limit. a decade later a couple of things have become clear. when is the concerns about moral hazard are no longer as valid and may have been overstated at the time. research has shown there is no

benefit to this being over 50 billion. there's no rush among financial institutions to grow over the $50 billion threshold in the market. it's time to re-examine that. in addition the number was hardwired. it doesn't go with inflation, doesn't go with assets or the economy so it shrinks over time. there's a catch all the federal reserve has authority if they see a bank engaged in risky activities or, throughout, collated institutions. they can still apply enhance credential standards but it's not a complete walk away. that doesn't this would mean i think the statute is a collective right as written. the federal reserves authority may be hemmed in the loaded. reasonable people can argue whether 250 is the right line or whether not to have a hard line at all. right now as it is written at

249, the fed could decide not decide not to provide, hence, you grow to two and 51 and all of a sudden you're in as your systemic risk profile changes. three things i don't like. one, they should be something in there for consumers. we multiple, major scandals within the financial services industry. what equifax has happened in terms of data breach, not just problems there but with the underlying economics of credit reporting, one at a four people have an air on the credit report. the remaining aaron klein out there, not also pay their debt. try getting your credit report fix. there's no legal requirement to be any accuracy in your credit report, beyond which the system and economics within credit reporting don't favor fixing it. there should be something in there to address that. there should be something in there to do some of the problems uncovered in the wells fargo scam. other major deregulation bills

have included new consumer ideas, the community felt i mentioned institutions act was passed as part of the actual provide access to low-income communities. we could use more access to new businesses and more access to credit for new businesses. coupled with that it would be nice if this were the end. one of the things i like about this bill is that it accepts the framework of dodd-frank and tries to modify it. one of the things i don't like is that i don't feel an acceptance modified frame is enough to put this issue to bed and move on. we can't constantly the relitigating the response to the last financial crisis. we have to put in place the new framework and see how it goes. acting cfpb director mulvaney last week call this a beachhead. from my perspective this is the end of the set of changes, not the beginning. the second thing i don't like

his section 402, the treatment of custodial assets that michael referred to. let me just, without getting overly complex, current bank regulation has two binding constraints, simple leverage ratio and a risk weighted ratio. i like them both. i call the the chopsticks approach to financial relation. with two chopsticks you can eat elegantly and with one your stat editor i don't like one ratio urges using risk-weighted. but the thing about the simple way that ratio is it simple. what this section does is it takes one activity and says this is so safe, we don't need to be part of a simple leverage ratio. okay, maybe. if you really believe that, then do it for the entire activity. what this section does is it exempts only three institutions, and not the other 30. so what you're having is government picking winners and losers within an activity that

will cluster that activity within those three institutions. clustering a system of important activity like custodial assets within a smaller number of institutions increases systemic risk. that's not the goal of the bill. i think there are two logical places to go to fix that. one is a limited it and keep the simple leverage ratio simple. that's my preference. number two is it policymakers want to keep this out of the ratio, kick it out for anyone. we are kind of ended up with the worst of both possible outcomes. and the last problem i have with the bill is that removal of the disclosure for about 4000 financial institutions to report data that's been reported for years on racial information on home mortgages, from home mortgage disclosure act. look, it's a horrible thing to say but it's true.

there is still racism in society. they're still a legacy of redlining, of which the federal government bears a lot of fault for promoting racial discrimination in lending, but so does a private market. one of the most powerful tools we have. i think, i would hope people in the free market perspective would prefer a data collection as opposed to government regulation. let the data speak. this bill exempts about 85% of banks from reporting data therapy 44 years on racial discrimination. i think that is a bad policy. i am concerned just by leaving as with the data by the big banks we will draw some of the wrong conclusions and i don't know which way about racial disparities in lending. i will close by saying one of the reasons i have a big supporter of america's small bank network which i think should be a comparative advantage for our economy is that it allows banks to provide credit to people who don't fit

this giant credit commoditize bucket that we've moved into more and more as technologies have allowed commoditization and cyclization to credit to a cure -- occur more easily. small banks knows the communities and can make these loans to people ago you know what, for whatever reason you don't fit this big box, perhaps there something wrong on your credit report, but we're going to provide you credit. that's fantastic. that provides the new value of opportunity. that should work synthetically with also providing information about the type of folks because i would guess it's one of our best tools to combat discrimination. in lending. so i wish that would be changed in this bill. those are my thoughts. thank you very much for having me. >> thank you, aaron. and thank you for the segue. >> i'm glad to be here. i'm very excited about the building on the senate floor this week. the best thing about this bill

is that it's a bill that can pass the senate, and passed with 60 plus votes. we had seen very few bills that attract this kind of bipartisan support. the vast majority of banks in this country are community banks. there's about 5700 banks in the country now, commercial banks, and if you shave off the top 15, 20 banks, the largest ones being in the trillions of dollars, most communities are served by a community bank. this bill is targeted at those banks. the vast majority of provisions in this bill are targeted at community bank. let me just say from the beginning, we are not looking at regulatory relief for the sake of changing some regulations. there's a broader purpose for this legislation. the purpose is not tweaking a few regulations and changing an

asset threshold on very complex regulation. the key point of this bill and in the title of this bill is economic growth. what we've seen with dodd-frank applied a very heavy hand of regulations across the board for our banks that are trillion dollar banks, thanks banks thae $15 million banks. what this bill is intended to do is right size a lot of those regulations so our community banks around the nation can do what they do best, and that's land in their local markets. since dodd-frank past we have many of our banks dropped out of the mortgage business because it was too complex, too many rules, so a lot of the rules in this bill that are being changed are addressing the mortgage lending space. so keep those community banks and mortgage lending. if you're only doing 50 or 100 mortgage is a you as a candidate bank, you have to do tens of thousands of dollars of new regulations, you're going to

reassess and maybe drop out of that business, which defeats the whole purpose of dodd-frank was to rein in the largest banks and control systemic risk. if you have more small community banks leaving the marketplace and scaling up, then you're left with only a handful of banks at the end of the day. you have greater systemic risk. one of the things i like about this bill is reducing the regulations on community banks so they can stay viable in the marketplace and extend credit, which is really the lifeblood of many communities. there are thousands of counties around the country where the only physical presence bank is a community bank. i like that bill for that reason, not because we want to tweak regulations. it's really about economic growth and being able to serve more consumers. i want to correct one thing, the

bill is only addressing new reporting. in dodd-frank, dodd-frank in the statute of the legislation put in about five or six new data fields that would have to be collected. the cfpb took that and add about 20 more to it. what the legislation is doing is all the existing reporting on mortgages is there so that not going to be any new discrimination or anything. what it is addressing is new data that would have to be collected in addition to what dodd-frank put in and cfpb put on top of that. so it was overkill on new data reporting. and look, banks don't want to spend their entire day collecting and reporting data that then turns around and is used against them if they miss punctuation read something in accurate in their mortgage documentation and their attack

for that. so we don't need all this new reporting data, and even with the new hmda exemption here, 97% of all mortgages would be covered by the hmda reporting. so we are not too concerned about that. what we really are concerned about is keeping community banks and small banks in the marketplace so you don't have the concentration in just a handful of banks doing mortgages as we have seen. i'll stop there and we can talk further about other provisions. >> thank you, paul. sort of going along that same spirit but a little bit of a a switch up, one of the things we're hearing a lot in the background is there's room to do some capital market exchanges and that's what my colleague david byrne is with us. david? >> norbert asked me to talk about some things that should be in the bill that are not in the bill, and i have identified nine

items, all of which would improve a regulatory environment to raise capital seven of them have passed the house on a bipartisan basis, some cases unanimously or nearly so, and then to others. let me just quickly run through the nine items that should be included in this bill, and really shouldn't be controversial and should be able to achieve bipartisan consensus here ..

and then brought it in two respects. one, brokers would buy which he really means registered representatives would be working for a brokerage firm would be able to invest in private placement, and then also gives the sec authority it already has broadened the definition of accredited investor on regulation d. regulation d for those who are not familiar is the safe harbor provided by the sec in 1982 with if you meet the test set forth in regulation d you will be treated as a private citizen and therefore not have to honor registrations to go public. registration statements cost roughly 1,000,000 and a half dollars in lawyers fees so it

basically is something that is not available tosmaller companies , so and also at this point i believe the latest data shows that about 1 and a half trillion dollars in this country, it's actually larger than the public market in terms of capital raises. it is the most important way that we raise hot capital. there is what i would consider a drafting error in the billthat should be fixed . the broker under the securities law means merrill lynch, not the people that work for merrill lynch that it clearly means individuals that work for merrill lynch should be the ones that can address in this place because almost every broker if not every broker would meet the institutional requirements under regulation d anyway. the next is the small business mergers and acquisition tales act which

is really a business broker bill. introduced by representative huzienga. it passed in december by a close margin, 426 to nothing. basically what this bill would do would say that business brokers who basically serve in an intermediary from a drycleaner selling an entire business to a new buyer or a local hardware store, so the entire business to a new buyer doesn't have to register as a dealer and to suffer from the same regulatory regime as merrill lynch. it obviously has very broad support. it passed the house this congress and last congress, senators have never taken it off . the next is improving access to capital acts by congressman, congresswoman selma, hr 2864 which passed

the house in september by a vote of 430 to 3 . physically what that bill does is allow registered companies to use regulation a+, the sec made a mistake and prohibited that for no good reason. the regulatory disclosure requirement for public companies are much more strict and stringent than regulation a so there's nothing lost to allow the public companies which constitute a great deal of informationto use regulation a to do a raise . which is why it passed with only 3 to 7 votes. the small business or mission act introduced by congressman quinn, hr 1312, again, another very controversial bill that passed the house by a vote of 460 nothing in may of last year. it's one of those sort ofgood government bills .

in 1980, congress required the sec to hold an annual conference on small business capital formation. every year people from around the country gather and make recommendations about how they could improve the regulatory environment. every year most of the commissioners come to this and explain how important small business capital formation is and then they go away and do nothing. then they come back, the next 18 and they say how important small business capital formation is. this has been happening for 35 years. every once in a while they do something but it's rare. it's relatively straightforward, it requires the ftc to respond to any recommendation made by the small business forum which depends on the year and the structure of the conference 10 to 15 recommendations and explain their views with respect to the recommendation

and what they intend to do about the problem identified. the next is the halo act or helping angels lead our startup act. for those of you who are familiar with the entrepreneurial culture in particularly the west but also some other places, they often hold these forums where angel investors, meaning people who are in credited as investors can invest in the startups. they come and it might be 50 or 100 in a room. the driver makes a 10 or 20 minute pitch and then they move on. and then they cycle through. and under most east coast interpretations of the securities laws, that would be an illegal, yet it goes on. what they lack does is

subject to criteria allowing angel groups not to profit from university and so on and so forth to hold these events and forums so that startup entrepreneurs can make their pitch to potential investors and and this environment without going against the general solicitation rules. i think that could be useful and important. it was introduced by congress by hr 79 and passed the house in january 2017 and it passed the house by a vote of 344 to 73 in a bipartisan piece of legislation. another piece of legislation that passed the house by a vote of 419 to 0 is the encouraging public offerings act, grossman bud joined 3903. what it does is extend the act relating to testing the

waters, currently available only to emerging growth companies which is a category that by its very nature expires after five years because you can only be an eec for five years to all issuers so that it would basically allow people to test the waters meaning offering, of financial investors without making an offer to get a sense of what they could sell securities for and make confidential filings with the ftc before they do their full-blown public offering. and again, that passed 419 to nothing. it seems like it's something the senate should take up because it would make it easier or them to raise capital and depress their offerings. two other bills that in my judgment deserve serious consideration is the micro

offering safe harbor act, congressman emerick introduced it, hr2201. it passed the house in november . by a significantmargin , but it wasn't unanimous like the other solutions. what that bill does is basically answer the proposition that extremely small offerings under $500,000, 35 or fewer purchasers or entirely to people within the us for a pre-existing relationship, you don't have to register and become a public company and spend 1,000,000 and a half dollars on lawyers. the original legislation basically said it's a, b or c , legislation was actually passed by the house with a, b and c so it's an extremely narrow bill in its current formation because you have to

be under 500,000 purchasers and have a substantiative resisting relationship with all the purchasers whereasthe original legislation was in my judgment much better . it would have been any of those three, not all of those three. so that legislation deserves serious consideration by the senate and the last is a piece of legislation again by congresswoman cena that has been reported out of the house financial securities committee but not adopted by the entire house. this was pointed out after thanksgiving and what it would do would be to extend for five years the emerging growth company exemption from internal controls reporting regime under section 44b. that all sounds highly technical but that is an extraordinarily expensive

access of being a public company and the small firm context is the least of money to the enrichment ofthe accounting profession . and that's it, but there are a lot of things that the senate could do that have extremely broad bipartisan support and could improve the regulatory environment for small startup companies seeking to make capital or small companies seeking to go public. and the senate really should take these things up. >> just for a little bit of perspective, there's a delicate balance right now with the senates i guess they would call it bipartisan agreement but everything that everybody that i know of has been talking about is that there is something with overwhelming support, that is the sort of thing that they could add to the bill. so that's why it's very important on this especially

on the things david was talking about. these are things that have passed the house again initially or voice votes or things like that. they're open to doing things that are not controversial so this bill probably is going to pass and it is going to be amended in some way and those are some of the things that could be in there. so before we talk about that process,they'll get my wish list for changes really fast . one is on the provision erin was disgusting. erin and i see it a little bit differently. my view is that if it's going to have a coverage ratio, it's about liquid assets as in cash. if you look at liquidity coverage ratio is about cash in and out, therefore while erin is correct, some of the things i defined in the crisis, we don't know we you know that about cash and

treasury securities and nothing else. so in my view if we're talking about cash and just cash, then we should stop there. i think they got it right the first time and i don't think they should go back. that's a little bit different but that's my view on that one. the second one i would like to see change is on policy is the reciprocal deposit provision. i would like to if you're going to have a limited exception for a reciprocal deposit is notbeing brokered, it's very limited . or at least be neutral on how that plays out if it's very limited and i don't think it's limited enough right now. i think it should be changed so that it's not just reciprocal deposit, it should be some other third-party arrangement, something like custodial should be in there and most importantly i think the percentages should be dropped . as it's written, it's 20 percent of total liabilities

and i don't see any reason why it should be that high. it's much more comfortable with something like 10 or five and all these numbers are arbitrary but the point is that it should be limited and the more limited, the better.my last one which and actually paul, i love to get your thoughts on this. my last one is i'd like to see the leverage ratio change. community bank leverage ratio. regulatory discretion here and in my view be better to pair some of that back. one way of doing that i think should honor a good deal of support is to adopt or amend the tom huntington proposal from 2015 and what you would end up with is essentially a four-part test. so instead of having it the way we have now where the bank could meet the asset threshold, meet the leverage ratio and still not qualify for regulatory relief, instead what you would have is if a bank meets the

leverage ratio, meets the asset requirements, has zero trading assets or liabilities , no position in derivatives other than interest rates and foreign exchange derivatives and has a total derivative exposure, maybe 8 million because that's one that was used in previous margin rules . but i'm flexible in that if you meet those four parts , then you are out. in other words, then you qualify. if not, the regulator can still have discretion on a list profile but then there's at least a clear, very clear four-part test that virtually all traditional community banks would easily meet without any other lack of clarity from the regulators. that's my wish list. >> well, there's a lot of change that could be done to the bill but being at a think

tank, we are talking policy but we also have to consider really the most important thing this week with the bill on the floor is politics. and to get something with 60 votes is a delicate balance. many of the bills that were introduced since dodd-frank have been republicans or democrats. here's a bill that's been balanced to get 60+ white vote and have over 13 democrats supporting the bill you get a filibuster proof majority. there's all kinds of great changes that could be made to the bill. i hope some of them can be included in the final passage, like doctor lee, the internalcontrols, very expensive for banks .

to do goes, it's double auditing them. there are bank regulators of all kinds making sure their books are accurate and you have that law coming in again with the accounting firms and certifying the same thing. it's very expensive but that all said, we have to look at both the politics of this legislation and the policy and you have to have a right mix. one thing i'll say on the macro level, this is the first major rollback in reassessment of dodd-frank rule. if this doesn't get traction in the senate and passed in the senate, we will be in the desert a long time wandering around why didn't we take something that was very good and could get 60 votes and with this passes in a bipartisan way, i think it's going to open up negotiations to do even more in the future. >> that's exactly my concern. >> this shouldn't be the first.

this should be the deal. the debt ceiling shouldn't continually be raised. you can't keep going back at it. >> there's no law ever permanent, you keep changing the tax codes and you talk about where going to make these tax cuts permanent. there is no such thing there's two distinctions. the tax code process has been a debacle and it's why the process politics is far better. constant sunsetting of that is budget gimmicks much like the budget gimmick congress is doing with the federal reserve surplus. bank regulation, letting politics dominate bank regulation leads to policy errors that tend to make us all worse off. that's why i'm nervous about this custodial thing. the balance seems politically stable solution seems to be carveout for these three because they're the ones who care about this the most and

if you do it for everybody, you are benefiting big banks and that's politically challenging. if you do it for no one, you are addressing the core issue but then government is picking winners and losers could make the whole system worse off . with regard to the specific section 201, i'm a little nervous about that section because i'm nervous about this philosophy of knocking out capital. we may find more common ground is a regulatory approach that allows banks to innovate,take risks and fail. we have 6000 banks in america . you have a city that has 6000 restaurants and you came back in a year and all 6000 restaurants were still there, not the mark of a healthy economy. >> we ought to be in a situation where banks are businesses. they come up with new ideas, they test new ideas, they fail.

a period in american history would be the longest we've ever gone without a bank failure, 2003 to 2006 . that was not a period of health in the banking system. we need a regulatory framework that embraces innovation, petition and is comfortable with failure. and i get nervous about things that remove one of these two thresholds. of risk based capital or simple leverage ratio. but i'm equally nervous with bank regulators who believe their job that nobody should fall under their watch. >> i want to have another event with you and talk about risk-based capital. we can't do that right now that i'm encouraged to hear you say that because i agree. i think you're exactly right. we don't want to let banks fail and it's a terrible mistake. that notwithstanding, before we get some q&a, just keep things moving along let it go down and see if anybody has any thoughts on how this process might unfold now in the comingweeks . whether we're going to look

at some kind of conference or quasi-conference or managers package or amendments or if anybody wants to see. >> sure, i'll jump in there. it's been pointed out, a lot of these bills actually originated in the house and passed with a wide margin. a lot of what's included in bill 2155 as companion bills that are passed out of the house with her out of the house financial services committee or even passing the full house so i think there's a lot of opportunity to have a house quickly take up the senate bill, maybe some modifications. maybe not. but the best news here is that you have a bill which we haven't seen in a long time, particularly on complex regulatory relief measures that can attract 60 votes in the senate. i think the vote will be much stronger. this bill is community banks and credit unions, community banks are in every congressional district around the country has greatsupport

. the house, i think wants to pass something as well but it's always been stymied by the senate in that 60 vote threshold. i think at the end of the day even if the house takes just the senate passed bill, if it passes that we will will be in much better shape and getting nothing at all. >> i'm not sort of agnostic on that and i hopefully will proceed but i can say with confidence that for at least the last two congresses, the capital markets bills are usually if the house passes, then the senate receives an amendment and in the conference. if the senate, if there's no forum here i would hope we would have a repeat of that process where these really nine controversial or broadly supported bills are included as part of the legislation

reported out of the conference. >>. >> is a little bit unclear i think with this process on the floor. there's a lot of talk of including new provisions in the so-called managers package that could be some of the capital market things thathave come out of the house, there could be other ideas. the with facts issue resonates broadly and if congress can only have one crack over two years to handle financial services , it would be a shame if it didn't directly impact more consumers than any other area. let's face it, congress, we didn't get dodd-frank because congress got around thinking about a new bank regulatory structure. we got it because the financial industry blew itself up. so congress response, i think there will be something on the credit reporting agencies i would hope but their houses passing something different

and is this all conference, i don't know. i would point out one of the hallmarks of transparency in the legislative process is the conference by dodd-frank. there was an open conference with televised live on c-span. i can't really call another bill i've ever worked on in my 15 years that has an open door conference. usually a conference committee between the house and senate meets once to vote upon the deal that they've agreed to. maybe they meet twice to open the conference and then close it. this was one in which you can stay up till three in the morning watching members cast live votes on complex issues in front of the cameras. i think transparency is important in financial regulation. it's complicated. the details of sponsoring this legislation are not easy. we explain it and it's for people to make up their own mind but there needs to be a transparent process in court . >> also that hope. my gut feeling is not going

that way but we will find out. let's see what we come upwith this week . that concludes our plans up here and we can open up and we have some time to do question and answers if anybody in the audience wants to ask, please have a microphone and it just state your name and affiliation if you would.>> i'm an angel investor but i had a different question and i believe we've got to consider political reality in this bill and i think one of the things that the democrats are going to fight against is limiting the cs pb. there's got to be something like the cfpb or they're not going to vote for this. i know heritage has recommended limiting but what else can there be? there's got to be some revision in this bill that will address him a consumer concerns.

i'm one of those that lost my information in the equifax data breach. so i'm wondering how can that consumer issue be built into this bill? >> that's a very good point, there's always been consumer laws and consumer protection in the financial services sector. they used to be housed at the federal reserve and after dodd-frank, they were moved to a whole new agency, the cfpb. you could debate the structure of the cfpb and how it should be structured , should it have a single director . what we've advocated for sense dodd-frank is to have a bipartisan commission run the cfpb so it's not just one individual that has tremendous authority over consumer regulations. i think that could be

structured much better there. but there's no elimination of the cfpb in here. as a matter of fact, there's a lot of rules and regulations that the cfpb and put in post financial crisis that are actuallyburning and harming consumers. we talk about mortgage lending . many of our community bankers have gotten out of the mortgage lending business because of volume in some places and the rules and regulations coming out of the cfpb on qualified mortgage and ability to repay is hurting the consumers so i think this bill does a little bit to refocus on helping the consumers and as i said at the beginning, where not doing this bill, we're not pushing this to reduce regulations on banks. that's nice, that's a great thing but the macro point of this bill is to have greater economic growth, greater flow of credit particularly in those communities, we serve 85 percent of all

agricultural loans are done by community banks. nearly 60 percent of all small business loans are done by community banks and we only represent 20 percent of the industry assets in comparison to the trillion dollar, $2 trillion largest wall street international banks where a small segment of the banking sector overall but we are very important so these rules are really about helping the consumer's ithink as a political reality , some of the bills caught in this legislation was not to directly address the cfpb and there's almost nothing in this legislation that addresses the cfpb in terms of structure, funding, etc. this is one of my criticisms, there's going to be something in the appropriations bill that cuts the cfpb

independent funding that's not going to end it into law because of the threat of the democratic filibuster. we're not moving on these questions. the office of the comptroller ofthe currency was created a national bank charter under which many of the community banks operate . it was established by one of the great republican presidents in american history, abrahamlincoln . as a single agency director. we seem to have not, i've not see many debates about whether we should have a comptroller of the currency, whether there should be a board or not. we've moved on from that. we shouldn't bedebating the lincoln era approach bank regulation . any more than we should have moved on from the euro, with regard to qualified mortgages, what you do get touched on in this point, as michael described in this bill, this is a subset of the rules. i'm going to be clear on a couple different things. number one, the cfpb had a very challenging task to write this new qualified mortgage rules within

dodd-frank that was given to the bureau in part because other regulators includingthe federal reserve had authority on subprime mortgages is and they royally messed up . a brand-new entity was given a complex rule and a tight deadline. they met their deadline, they were the only financial regulator to put out all the rules by their statutory deadline. it's often an unrealistic deadline by congress that they metal their deadline and they put out qualified mortgage and it was widely, the rule was widely supported by industry and consumers. at the time. some of the biggest critics of that rule were barney frank. believe it or not who said once about the qualified mortgage rule it was the exemption that swallowed the rule. i'm a little bit more along with the line of congressman frank . i'm more concerned about mortgages that fail to meet and ability to repay test. >> ..

financial services industry and originate to distribute mortgage world that was bonkers, that tweeted a bunch of mortgages that blew up. imposing some commonsense regulation of what types of mortgages you can have a something uncomfortable with, or put a different way, going back to 2003 and four levels regularly of compliance a mortgage loans would be a cute mistake, in my opinion. >> i think, i'm in the ballpark with you on that one but one of the reasons they got the rule done on time is they punted it. any gse eligible mortgages off the hook completely. they will not change that right now. if you want to see things blow up quick. they will not do any major change in the cfpb.

practically speaking that's not going to happen. erin is right pick one of the things we've always pointed out is one of the main pieces of creating the cfpb was to transfer roughly 20 federal consumer protection statutes to any agency. from our standpoint we didn't need a new government agency to do that. you could've put at the federal trade commission. that's what they do pick something like that seems like a moderate compromise but that's a nonstarter now for sure. i mean, that's just not going to happen. any major changes right now are not going to happen. >> did you deduce anything for as this bill moves forward to you deduce ending for financial form or any other controversial areas this year? >> out of this one? no, i mean, i don't think housing finance reform happens this year in any way.

legislatively, not this year. and then beyond that, we will see. >> so the last bipartisan banking bill was the emergency economic stabilization act of 2008, better known better known by section 101 of the love which was the troubled asset relief program, or tarp. it gets only four votes in the united states senate. i doubt this will bill will get that many. what i did used is, by the way, of the 74, of the 25 who oppose, it was kind of split relatively evenly between the parties. what i deduced was during the time of great crisis democrats and republicans came together, and did something tremendously unpopular but economically necessary in stabilizing the economy. that created the fallout from

that with such a toxic political environment that the historic response to the financial crisis, which in banking had been generally these deals get caught on big bipartisan numbers either on a pro-regulation and deregulation side, gramm-leach-bliley last night-ten at the end of day one of the big deregulatory bills. two of the dig graves or responses of the saving and loan crisis, big bipartisan bills. what happened to the financial crisis was different. it fractured our country in a way that we're still dealing with the framework from. there was a bipartisan deal, extrema joseph in dodd-frank. we can debate why didn't happen. i don't think anyone can question his effort to make that happen. he got three republicans at the end of the basalt wasn't completely partisan but it's a small number. maybe this means that partisanship is back in banking, but i would say the next area at

a bipartisan consensus to tackle is our outdated tank secrecy act and anti-money laundering law to compensate if you really want to look at inefficient regulation that's retarding economic growth and hurting consumers, particularly d de- risking low income consumers from having the option to get a bank account is the meta- money of the small banks are paying on an ongoing forward bases marginal rate, scrutinizing all the different aaron klein and filing tremendous amounts of paperwork on anti-money laundering. i will just just close on that point. the $50 billion threshold was on index in 2009. the currency transaction report is on index since 1970. at the time you could buy not one brand-new cadillac, but to brand-new cadillacs in cash and that triggered this report. today there's not a single new car out there that you can buy in cash and attribute a currency transaction report. >> you made a good point. banking issues have used to be

very partisan. i know the senate banking committee house financial services committee bills were passed on a very, very wide bipartisan margin. i think this bill has the potential to be a strong bipartisan vote. our position is if you're against this bill, you are against community banks, credit unions and the communities they serve. the overwhelming balance of this bill is focused on the regulations that are harming community banks ability to serve their customers. it doesn't do anyone any good if you want to help consumers in your putting the businesses out of business that serve those consumers and provide credit in their communities. i expecting a very strong bipartisan vote on this. if you vote against this bill, this is a key vote for our industry, if you vote against s. 2155 it's a vote against community banks. >> anybody else? any other questions?

>> only question, james. on the questions. >> abraham lincoln is not a model for economic policy. just get that out there. when he ran for congress, quit pro-spending for illinois and high terrace. >> high terrace are back in vote. >> yes. -- terrorists. you talk about bp and financial inflation or i don't think was an example of bipartisanship. legislation should be done. the problem was not over partisanship but it was not a model for good policymaking. in fact, on may be a better

model would be gramm-leach-bliley where most of the, what was done administratively, and by the time the bill passed it was almost a non-issue because the regulators actually did their jobs and rolled back the rules that were not needed. do you want to comment on that, or anyone on the bill? >> i think -- look, i agree, bipartisan does it mean right policy. there are plenty of mistakes that a bipartisan and are plenty of times in which the two parties reaching an agreement means politics trump triumph over good policy. just because something is bipartisan doesn't mean it's right. i would agree with that. i think you have to look at each think individually on the merits, and that something important to keep. on your other hand i do think it's worth noting that this

looks like it's going to have more of a bipartisan consensus than any other legislation since tarp. >> let me throw this out there after, on this point. this is going to happen. i mean, like something is very, very likely something will pass and it is going to be bipartisan. but as far as what we know right now is does anybody think there is anything terrible in this bill? >> well, i view this as kind of the goldilocks bill. it's not too far helping wall street. it's not nothing. it's doing some major reforms and it attracts bipartisan support in the senate, which if anyone who is watched the senate this congress, there is not 60 votes on a lot of things in the senate. so this is a bill that supports our communities and it's going

to attract enough bipartisan votes to get to the president and signed into law. and as i mentioned at the beginning, this is kind of the first bipartisan test case of what could be done on dodd-frank. i mean, if this doesn't pass there's not going to be an appetite to bring up any of these good reforms going forward. it's just going to be table and it will be a long time before we get to any of the banking relief. if this passes i think it will create and a private of goodwill, bipartisan goodwill, that other things have been brought up at this conference to be addressed in a bipartisan way as well. a lot of banking regulations are attracting bipartisan attention of what can be fixed or altered. this is really the first important bipartisan test case on financial reform.

>> erin, what is -- >> i listed my top three problems, and -- >> i have mine, to. on a scale of one to ten, ten being atrocious. >> look, if you come back in time and you say to me, 30 30 s later there's been a financial crisis, i can pin point the mistake to s. 2155, what was it? i would probably say 402. sorry, the government would be providing favorable treatment to only three of 30 plus entities that do this that would concentrate that activity, and their definition could include things supposedly supersafe as you point out but by one definition creates that would qualify. folks are able to use supersafe one day that becomes super

risky. crisis occurs because something to look safe turned out not to be. crisis never occurs because something everybody knew was risky turns out not to have worked out, right? i am very concerned about this idea this is the first bite of the apple, that we will just keep gnawing away and gnawing away and gnawing away, and eventually you will hit the core and that continues to concern me. it also concerns me that we are missing an opportunity to -- >> i don't lie awake at night worrying if congress will deregulate too much. this is the heritage foundation, for god's sake. >> i i mean, you know, -- [inaudible] [laughing] >> i worry about the regulators we have doing that, and anyways. >> do we have any other questions? paul? [inaudible] >> and then john.

>> reciprocal deposits, i'm not sure why they deserve favorable treatment, you know. we have deposit insurance limits for a reason and i'm not sure why they deserve all this extra benefit. the numbers will move i suspect, going from 50 to 100 is no big risk. 250 i don't really have a problem with i think i testified, i think i was only guy who said on the stand. if to have a number i said to 50, that would be it. i'm pretty okay with that. the securities law things that david brings up i think sound very reasonable. it would be nice if they get some of those things in there. it's a goldilocks law which i think gives it a good chance of something happening. more power to them doing their job, i think. >> michael think on reciprocals, i agree, my preference, , my

optimal would be not to do this. my thing is if they're going to do it it should be more limited than what's in there. john? >> john, the competitive enterprise institute. i'll phrases in the form of the question even though i believe i know the answer. i had to ask something or ask for point of something as far as what aaron said. the office of the comptroller of the currency, is that removable by the president? because of decision made by the court which you should either have cabin offices, a single had that his mood or you bipartisan commission or removable for cause. it's a rare you have a single director i can't be removed. can the office of the comptroller be removed and what is the standard for removal? >> so i an economist, not a lawyer. i know that the powers in the bureau were modeled on the comptroller of the currency pair kind of the comptroller of the currency is part of the treasury

department, although he or she functions in a historically independent manner. i've actually one of my jobs what is in the treasury department was to shepherd this executive order through, and one of the boxes i do look at all the different boxes of the treasury department, bureau of engraving and printing, comptroller of the currency, all these different folks. being a good bureaucrat i call the comptroller of the currency as you listen, i've got a box, i had to fill in this box. you are an independent agency. i'm not trying to exert any pressure from you from the treasury department. here's the thing from the president, and executive order. right in your box and give it back to me and i will pass it along. okay. call me back a couple weeks and they say we determine executive for the president doesn't apply to us. what do you mean? this is an executive order of the president of the united states. that applies to the executive branch of government. i'm an economist but i was a

child and i saw the three branches of government and i don't believe you're part of the judiciary and i know you're not part of the legislative because that's what i came from. they go yes, well, we are independent. i said i don't really understand but i like it bureaucrat. just can't i write, i have to write something in my box, right? like i can't have an empty box. they go -- at i write the office of comptroller does not believe this executive order applies to himself? they go, yesterday i was like, okay, that's that's kind of weird, but like, that's what i will write. my job is to fill the box. i send it on and that was the last i heard. the idea of having an independent entity within the federal reserve which is also an independent entity, things are getting kind of weird here. is there a fourth branch of government? i don't know. it's a broad court, to pay for all that to decide. what we found with the

comptroller of the currency seems to work and been stable. what its basis is in constitutional law escapes my humble mind. [inaudible] >> any basic reasons, but not even for cause, whereas there is malfeasance are very high standard and the cfpb so they know company, even if the exercise, the president has the power. >> i think we are a lot of things in this country that may not even written into the statute but a kind of common conceptions that have made our system work more functionally. i think under this current administration those common perceptions are being questioned to their core in ways in which the president has acted. they are just different. i'm not trying to make a partisan position. condescend to say the president has taken things they used to be

taken for granted like after release your taxes, just turned us questions on their head. i think our society will shake out one way or another from that. [inaudible] >> one thing i would jump in and say, congress has to do their job of reviewing regulations as well. i think a lot of these independent agency and get carried away in implement and regulations. for example, i mentioned earlier that dodd-frank put in a few new data reporting requirements and the cfpb took it and went this far with it and put in all kinds of new regulation. congress should come back and yet the congressional review act. that was a vote on mandatory arbitration where congress

reviewed the cfpb rule and said no, we are throwing this out. it shouldn't apply this way. so congress, you do have the different branches of government and you shouldn't have wildly independent agencies of any kind, whether it's in the fdic or occ or the fed, congress has to be part of that as a check about. >> congress has been highly schizophrenic on this. the occ used to have to submit their congressional testimony to the treasury review process, and then congress making a more independent of treasury allowed an exemption of both treasury and white house clearances. the congress, every time they created new regulators under democrats or republicans, whether it's the cfpb or the federal housing finance agency, an idea proposed and enacted when lots of republican authorship and signed by president bush, single agency

head. single agency head so congress keeps creating agencies with single agency heads and then has a difficult time confirming anybody for the job because they do the job as being so powerful and maybe there should be a board or commission, et cetera. then they create a new -- single agency had. it's been a very bizarre process and this isn't just picking one to our topic. you have a trend. three new regulators make a trend, all three of which about single agency heads. >> my understanding is it is legally problematic. i'm not a lawyer either. either way i am 100% certain it's not going to be addressed in this bill. >> if we don't have any more questions, then we can wrap it up, i think. thank you guys for much for coming. we appreciate it. [applause]

[inaudible conversations] [inaudible conversations] [inaudible conversations] >> the u.s. house comes into session at noon eastern today, about in ten minutes. at two p.m. eastern they will begin legislative business for the week. on the agenda legislation we can epa clean air standards. the use senate convenes at 3 p.m. eastern to consider nominations for three district judges with confirmation votes coming up at 5:30 p.m. eastern. tomorrow the senate will work on

legislation to ease banking relations under the dodd-frank financial reform law. you can see the house live on c-span at noon eastern and the senate live here on c-span2 starting at 3 p.m. education secretary betsy devos will address the gathering of state education officials at the conference in washington, d.c. this afternoon. you can see her remarks live starting at 415 eastern on a companion network c-span3. later also live on c-span3 vice president mike pence and you and ambassador nikki haley will be speaking at the aipac annual conference in washington and that starts at 5 p.m. eastern. >> tonight on c-span's landmark cases we will explore the civil rights cases of 1883, the supreme court decisions that decisions that struck down the civil rights act of 1875, a federal law that created all

people access to public accommodations like trains in theaters regardless of race. justice john marshall harlan noted as the great dissenter cast the lone vote in oppositio opposition. explore this case and the high court ruling. watch live tonight at nine eastern on c-span come c-span.org, or visit with the free c-span radio app. for background in each case why you watch order your copy of the landmark cases companion book available for $8.95 for shipping and handling at c-span.org/landmark cases. for an additional resource there's a link on our website to the national constitution center is interactive constitution. >> the institute for research middle eastern policy and the americ