>> and will be taken up by the full senate on tuesday. the heritage foundation hosted this event. welcome to the heritage foundation at the louis lehrman auditoriulewis lemonauditorium e who are joining us on all these locations and alsoccasions and n network. for those in house we would ask that the devices have been turned off and for those watching online you are welcome to send questions or comments by e-mailing speaker at mac heritage.org and of course we post following today's

presentation. leading the discussion is the senior research fellow financial regulations and monetary policy in our institute for economic freedom. studies and writes about the monetary policy, the reform of fannie mae and freddie mac it focuses on the best way to address difficulties in large financial companies under the rubric of the too big to fail problem. the joint heritage and 2013 and was a tenured professor the collegcollege of business teachg finance economics and statistics and served as the tax policy analyst in the center for data analysis and he holds a doctorate degree in financial economics from new orleans. please join me in welcoming norbert michel. [applause] >> thank you. joining me here today i will do

a short version in the interest of time, joining me from the far left is my colleague david gergen who's who is a senior fn economic policy at heritage and next to him is the group executive vice president of congressional relations and strategy the independent community bankers association and then aaron klein last but not least was a fellow in economic studies and directo atr 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 moving this week so it looks like we had good time. i am going to just do a quick overview of some of the highlights and main components

that are in the bill and then we look awould get the discussion g off of that. one of the main things is the community bank leverage ratio something they do not like to call and off ramps of the book with a community bank leverage ratio. this measure would provide relief for banks that are under $10 billion in total assets baby and i will get to that o in a second. it stipulates the federal regulators will put the actual ratio together but has to be tangible equity to assets and somewhere between eight to 10% so there is a regulatory discretion but it's a little bit to find. however if a bank meets its nees ratio under 10 billion in assets

and the regulators determine the risk profile is not okay, then they do not qualify for the relief even if they meet ratio and that risk profile is based on things like off-balance-sheet exposures, derivatives as well as other factors that the regulators might come up with. another would provide relief from the-standards that came from section 165. it raises the threshold from 50 billion to 250 billion but not really. it raises the threshold and allows any provincial standard to apply to the bank holding company with 100 billion in assets and then on top of that it still gives the federal reserve the ability to tailor the regulations to any bank

holding company below $100 billion so this is sort of a moving the ratio but kind of not. that's how i am taking this anyway. another major component is the ability to repay the standard if a bank with less than 10 billion asset agrees to hold the mortgage on their books and securitizing is it then they get a safe harbor i that is a potentially large one and it probably from estimates we've done i think it probably impacts about 25% of the mortgage market. the love of community banks don't hold a lot of them do and it looks like around a quarter of the market. stress test relief, the senate

bill would decrease the mandatory samaria that has to be recorded from 3-2 independent with chain to frequency of the company run tests for banks over 250 billion from annual to periodic and yes they would in fact still be doing this but i don't think anybody knows what periodic theme that it's not in google answers also a component that does the same thing for banks over 10 billion for the company run stress tests. the extension would be for banks less than 10 million asset and trading assets and liabilities that do not exceed 5% so it's not a blanket exemption but it's a pretty wide-ranging exemption. those are the main components and you will notice the threshold is in there for most

of them. most commercial banks by far the number is around 5,000 fear are only talking about a number of of that so it is something and better than nothing i think. i look at part of this stuff and then there's a bunch of minor provisions one of them that has been passed in the house is either the choice act or from separate bills. some of the minor ones just quickly, short and call reports with less than 5 billion asset into percent third-quarter there's another provision on the market decide provides regulatory parity for the national exchanges and expands the preemption on all stock exchanges instead of just the new york stock exchange. there is a reciprocal deposit

bill that i will talk about in another segment which would ensure they are no longer defined as broker deposits. it is a provision that includes general obligation municipal's as well as certain municipal bonds and for the high-quality liquid assets. then the last one they were changed and in 2015 this was for the banks that under a billion in assets and on an 18 month cycle this would raise the threshold to about $3 billion which would cover about 400 banks or so.

that is a quick overview of what is in the bill in my minor and major categories and i also have if you didn't see on the way in, on the way out there is an issue brief with a chart that lists the components and thus a comparison. what i would like to do to next is what are some of the things you like or don't like in the bill. >> thank you for having me here. i think it's fantastic that you have assembled a group to have this discussion and as you have outlined there is a lot of stu stuff. on a broad level i would say it covers more than just targeted

relief as some of its supporters put it under and is a lot less than that dodd frank. truthful somewhere in between. i'm going to list three things i like him three things and thret like in this legislation picking off the menu that you laid out i want to start with one thing i like and that is this is how a bill is supposed to happen as we learned in and this process is different from the process that is dominated with little legislation has gone through which is kind of closed-door leadership meetings with the cake is they can't afford. the chairman of the committee and the lead democrat or ranking member put out a call for all ideas together and hold multiple public hearings.

there was a substantive negotiations or twnegotiation tm couldn't reach an agreement. that's fine. subsequent to that a group of moderate democrats could reach an agreement. one could debate the wisdom of the democrats splintering and not having a united front. on the other hand, this is politics correspondingly the package has more than the 60 votes necessary to overcome a filibuster. it's moved out of the committee after a lengthy markup of the human things. have an open conversation and robust dialogue. one of the biggest mistakes in the process in my opinion was when republicans filed 419 offered zero at the committee markup, not because everybody wasn't there but when you have a committee markup, the chair says where's the amendment and if

nobody brings the amendment, there is a strategy to just not debate. democrats put forth alternativ alternatives. i look forward to a robust debate on the senate floor. this is the process. it's nice to be back to bipartisanship and to have an open process. so i thought that was kind of point number one. point number two section 403 involves municipal assets and debt. let me take a step back. the banks failed because of a lack of capital and they can also fail we use the term a little loosely because of the lack of liquidity the classic run on the bank with her is faulted for not any kind of crisis the regulators said we will have liquidity coverage

ratios and require that they to hold high-quality liquid asset. something very funny happened i don't know if you caught this but the problem is not having enough liquidity, it became high-quality liquid assets. having high-quality isn't necessarily the same thing but in the regulators find particularly in the international rule the two became synonymous. the corporate debt and government securities they have a fair amount. that relationship breaks down. let me give you an example if you own a small county water system you could have a high-quality asset but it didn't frequently trades. on the other hand of the top six, three of them were puerto

rican. what ended up happening were a no international comparison we'vwejust kind of ignore it. that's a problem because the corporate debt was treated so now a preference from the regulatory perspective one asset class over another and then subsequently the federal reserve appreciated that the torc courta different way in times of crisis it probably could be sold whether that requires a decent haircut as long as it doesn't change during the crisis and the federal reserve moved a little bit. the other bank regulators did not and there is enough uncertainty. i'm skeptical when congress weighs in at this level to see if it qualifies at this level when you get into the substances this is a very high haircut

ironically if you go back in time and rerun the test it would have qualified as liquid assets well into 2002, but the state of new york or the revenue bonds dedicated might not have so they are on parity with corporate data. the third thing i like raises the threshold and i want to get back to bite a debate on what the numbers should be there to understand why it should be changed you have to understand what the logic was and go back to the 2009, 2010 mindset. it's a very different mindset. when the concept is being structured subject to the enhanced structure of the regulation, the concept at the

time was we were concerned this would be giving the banks too big to fail and it would be an advantage to be one of the banks. policymakers were concerned that the markets would interpret the government stood behind you. this is 2009 where it wasn't clear which banks were stable or not. so we said wha what what is oneo get around the argument, let's set the line so low that it's clear if one of the smaller banks fail the government would not step imuststep in and provie extraordinary assistance so the market wouldn' would know wheres line was and that was the dominant rationale for setting the limit. a decade later a couple things have become clear, the things 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

150 billion, there is no rush among the financial institution to grow over the threshold and the market it's time to re-examine that. it doesn't grow with inflation or the economy so in real terms it to shrink over time. and as doctor norberg said, there is a catchall that the government has authority if they see a bank engaged in risky activities throughout the day can still apply the enhanced standards. it's not a complete walk away. it doesn't mean that it's exactly right. reasonable people could argue whether it is the right line or whether or not to have a hard line at all. right now it is not to provide the standards to grow to 51 and all of a sudden you are in.

three things i don't like. one, there should be some in here for consumers with multiple major scandals in the financial services industry what has happened in terms of the data breach exposed not just problems there that the economics of the credit reporting one out of four people have an error on their credit report and there are many out there not all of whom paid their debt. try getting your credit report fixed. there is no legal requirement that there be any activity on your report beyond which the system in the economics don't favor fixing it. there should be something in there to address it, to address some of the problems in the wells fargo scandal. other bills have included new consumer ideas, the community development financial

institutions act was passed to help provide access to low income communities. we could use more access to the credit for new businesses. it would be nice if this were the end. one of the things i like about this bill is that it accepts the framework and tries to modify it. one of the things i don't like is i don't feel an acceptance that the modified framework is enough to put this issue to bed and move on. we can't constantly relitigate the response to the crisis. we have to put in place a new framework and see how it goes. the acting director last week called this a beachhead. from my perspective, this is the end of the changes, not the beginning. the second thing this is the treatment of the custodial assets refer to.

without getting overly complex and the current bank regulation has constraints. i like them both i call it the chopsticks approach. with two chopsticks you can eat anything elegantly and with one you are stabbing at it so i don't like using just one ratio. the thing about this in old leverage ratio is that it is simple. this section takes on activity and says we don't need it to be part of the simple ratio. if you believe that, do it for the entire activity that what this does is it exempts only three institutions for the new custodial asset and not the other 30. so you have the government picking winners and losers within the activity that will cluster that activity within

those three institutions, clustering the systemically important activity like the custodial assets in a small number of institutions increases the systemic risk. that is not the goal of the bill. there are two logical places to fix that. one is to eliminate it and keep it simple. that is my preference. number two is if the policymakers want to kick us out of the ratio, take it out for everyone. we are kind of ending up with the worst of both outcomes. the last thing is the removal of the disclosure for about 4,000 financial institutions to report data thatoday that it has been d for years on racial information on the home information disclosure act. it's a horrible thing to say that it's tru true there still l racism in society and the legacy

of redlining which the federal government bares a lot of salt for promoting racial discrimination in lending but so does the private market. collecting data is one of the most powerful tools we have. i would hope people would prefer this as opposed to government regulation and let it speak. the bill exempts about 85% of banks from reporting data that they have reported for years on racial discrimination and think that it's just bad policy and i am concerned abou that just by leaving us with data reported by the banks we are going to draw some of the wrong conclusions. i will close by saying one of the reasons i am a big supporter of the network which should be a competitive advantage for the economy is that it allows banks to provide credit to people who don't fit this bucket that we

have moved into to allow credit to occur more easily. small banks know their community and can make these loans. but we are going to provide you credit, that is fantastic. that should work with also providing information about the type of folks because that is one of the best tools to combat discrimination in lending so i wish that would be changed. those are my thoughts. thank you very much for having. >> speaking of small banks, i am very excited about the bill being on the senate floor this week. the best thing about this bill is that it can pass the senate with 60 plus boots.

we have seen very few bills that attract this kind of bipartisan support. the majority are community banks with about 57 in the country right now and if you shave off the top 15 to 20 banks, the largest one is in the trillions of dollars most communities are served by a community bank. this is targeted at those banks. the vast majority of provisions are targeted at community banks and let me just say from the beginning we are not looking at regulatory relief for the sake of changing regulations. there is a broader purpose for this legislation. the purpose isn't taking a few regulations ar were changing the asset threshold.

the title of the bill is economic growth to apply the heavy-handed regulations across the board for the bank's that are 50 million-dollar banks is attempting to right siz ride thf the regulations so our community banks around the nation can do what they do best and that is to land in local markets. they dropped out of the business because it was too complex and a lot of the bills that are being changed are addressing the mortgage on a space, so keep those community banks and mortgage lending. lending. you're only getting 50 or 100 a year and you have to do tens of thousands of the regulations, you are going to reassess and maybe drop out of the business which kind of defeats the whole purpose of dodd frank to rein in

the largest banks and control the systemic secure more smaller community banks leaving the marketplace and scaling up, then you are left with a handful of banks at the end of the day and you have a greater systemic risk, so one of the things i like about this bill is reducing the regulations on the community banks so they can stay viable in the marketplace and extend credit, which is the life blood of many communities. there are thousands of counties around the country and we are the only fiscal presence in the community bank, so i like the bill for that reason, not because we want to tweak the regulations but it's about economic growth and being able to serve more consumers. i want to correct one thing on the data. the bill is on the addressing the new report and on dodd frank

and the statute could put in about five or six new data fields that to be completed. they took that and added about 20 more so with the legislation is doing u is all of the existig reporting on the mortgages is there so there won't 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 with him and see if pb on top of that, so it was overkill on the new data reporting. it's been turned against them if they have something in accurate in their mortgage documentations than they are attacked for that.

even with the new exemption, 92% of all mortgages will be covered by the reporting so we are not too concerned about that. what we are concerned about is keeping community small banks in the marketplace if you don't have the concentration on the mortgages as we have seen. i will stop there and we can talk about other provisions. >> going on the same spirit with a littlthata little bit of a swe of the things we are hearing a lot in the background is there's room to capital market exchanges and that's why my colleague is with us. >> i have identified the items all of which would improve regulatory environment.

but me just quickly run through the items that should be included in the bill and shouldn't be that controversial to be able to achieve the bipartisan consensus. hr 1585 by voice vote what it would do is to set up the monetary threshold for determining the investor at the current regulatory levels but by statute.

they would be able to invest in private placements and also give the authority under the regulation. for those of you that are not familiar with it, it is a safe harbor provided that if you meet the test set forth in the regulation it's treated as a private place and you won't have to go public following the registration statement it costs roughly $1.5 million.

i believe the latest data shows it should be $1.5 trillion raised iraised here in this cou. there is a drafting error in the bill but they clearly need to allow the individuals to be the ones to invest because almost every broker if not every would-be institutional. the simplification act which is the business broker bill introduced by representative in

477. basically what this bill would do is save the business brokers who basically serving the intermediaries for the entire business for a new buyer or local hardware store you don't have to be something for the same regulatory regime is barreling. it has broad support. the senate has never taken it up. hr 2864 which passed the house in september by 4323. it allows them to use regulation

but they made a mistake and prohibited that for the regulatory disclosure requirements for public companies are much more stringent regulation a super something wrong if you allow the public companies to provide a great deal of information