books on c-span2's "book tv." >> up next, a conversation on financial deregulations and consumer protections. we'll hear about legislation that revises part of the 2010 dodd/frank act. and which the senate has been working on this week. the heritage foundation hosted this event. >> good morning and welcome to the heritage foundation and our auditorium. we welcome those who join us on our heritage.org website on all of these occasions, those who are also joining on on the c-span network. we would ask for courtesy check that our mobile devices be silenced or turned off. those watching online, you're welcome to send comments or questions at any time.

e-mailing speaker @heritage.org. leading our discussion is n norbert michelle. in our institute for economic freedom. dr. michelle 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. he joined heritage in 2013. he was a tenured professor at nicholls state university clejt of business teaching finance, economics and statistics. he previously served here at heritage in our center for data analysis and he holds a doctorate. please join me in welcoming

norbert michelle. norbert? >> thank you, john. joining me here today, i'm going to a short version in the interest of time. joining me from the far left -- my far left is my colleague david birden, a senior fellow in quick policy here at heritage. and next to him is paul mersky, the group executive vice president of congress congressional relations and strategy at the icba, end community bankers association. and then aaron klein, last but not least, a fellow in economic studies and a director on 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 it looks like we have really good timing. it's brilliantly planned, of course, not luck. and i'm going to just do a quick overview of some of the

highlights, some of the main components that are in the bill. a couple of the minor things that are in the bill and then we'll get our discussion going off of that. so, one of the main things that are -- that is in the senate bill is what is called a community bank leverage ratio, something that the senate does not like to call an off-ramp so we'll call it a community bank leverage ratio in deference to the senate. this measure would provide relief from the basel risk waits for banks under $10 billion in total assets. maybe. and 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 it has to be tarngable equity to total assets and it has to be somewhere between 8% and 10%. there is some regulatory discretion there, but it is a little bit boxed in, a little bit defined, predefined.

however, if a bank meets this leverage ratio, under $10 billion in assets and the regulators determine that their risk profile is not okay, then they do not qualify for relief, even if they meet the ratio. and that risk profile is based on things like off balance sheet exposures, derivative exposures, trading assets and liabilities as well as other factors that the regulators might come up with. that's one of the main components. another is what we call the sify threshold. 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 that threshold and it still allows any prudential standard to apply to a bank holding company with $100 billion in assets. then on top of that, it still

gives the federal reserve to tailor regulations to any bank holding company below $100 billion. so this is sort of a -- we kind of are moving the ratio, but we're kind of not, i think. that's how i'm taking this, anyway. because they're really not hard and fast moving the ratio, they're not. another major one -- another major component is the ability -- some relief from the ability to repay our qm standard. if a bank less than -- with less than $10 billion in assets agrees to hold the morning on their books as opposed to securitizing it, they get a qm safe harbor. that is a potentially large one and from estimates we've done, think it probably impacts about 25% of the morning 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 senate bill would decrease the mandatory scenarios that have to be reported from three to two and it would 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 knows exactly what periodic means, but it's not annual. there is also a component that does the same thing for banks that are over $10 billion in assets for the company-run stress test. there is also rule relief. the exemption 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 i consider to be the main

components. you'll notice the $10 billion in asset threshold is in there for most of those. that's actually most banks. most commercial banks by far number of around 5,000, and we're only talking about a number above that that's in the 100s. so it is something. it is better than nothing, i think. that's kind of the way i look at part of this stuff anyway. there are a bunch of minor provisions in there. a lot of them overlap with things passed in the house either through the choice act or separate bills. some of the minor one, short and call reports for banks less than $5 billion in assets. short and all reports in the first and third quarter. there is another provision on the cat market side that provides regulatory parity for national exchanges. it ex-entends the blue sky law prevention. instead of just the new york stock exchange and the mx.

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 -- would ensure that reciprocal deposits can 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 in the -- that changes the liquidity coverage ratio. it includes general obligation municipals as well as certain municipal revenue bonds as level 2b high-quality liquid assets. and then the last one it would change the bank exam frequency again for a few banks. in 2015, this was done for banks with under $1 billion in assets and they put them on an 18-month cycle. this would raise the threshold to $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. and i also have out front, if you didn't see on the way in, on your way out there is an issue brief with a handy chart and it lists almost every one 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. and what i would like to do next is just go to aaron and say, aaron, what are some of the things that you particularly like or don't like in the bill? >> thank you. thank you for having me here. i think it's fantastic you've assembled a group of people to have a discussion on this bill that is before the senate floor. that as you outlined very well, there is a lot of stuff in it. it's a big deal bill, and on 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 it does a lot less than gut dodd/frank, which many of its opponents say it does. the truth falls somewhere in between. i'm going to list out three things i like and three things i don't like in this legislation. kind of picking off the menu that you laid out. i want to start with one thing i like, which is th, this is how bill is kind of 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 the lead democrat or ranking member put out a call for all ideas together.

they held multiple public hearings on this. there was a substantive negotiation. 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 -- this is politics. this is the vote. correspondingly, the package has more than the 60 votes necessary to overcome a filibuster. it moved out of committee after a very lengthy markup with over 40 amendments 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 amendments and offered zero at the committee markup. it was a 20-minute markup, not because everybody wasn't there to have 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. there was a vote. i look forward to a robust debate on the senate floor. maybe the package holds, maybe it doesn't. this is the process. it's nice to be back to bipartisanship and to have an open process. the last -- so i thought that was kind of point one. point two that i like, you mentioned it, section 403 of the bill that involves municipal assets and muni debt. let me just take a giant step back. banks fail because of a lack of capital. banks can also fail, particularly investment banks. we use the term bank a little too loosely in our momenomencla. whether or not a bank is softlvt at the time of crisis is hard to

know. liquidity being a problem, the linders said we're 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 not having enough liquidity, the solution became high quality liquid assets. having an asset of, quote, unquote, high quality and a liquid asset are not necessarily the same thing, but in regulators' minds, particularly as this was an international rule and started internationally, the two became synonymous. in the corporate debt, in the government securities space, 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 county's water system, you can have a very high-quality asset, but it's very illiquid. it infrequently trades. on the other hand, of the top six municipal debts that traded

last year, three we're puerto rican. that's not a high-quality asset but it's highly liquid. what ended up happening with the regulators say, god, this muni thing, this is really complicated. there is no international comparison, we'll just kind of ignore it. that's a problem because corporate debt got treated. now you've preferenced from a regulatory perspective one asset close over another. in addition -- and then subsequently the federal reserve appreciated that, appreciated that there are high-quality liquid muni assets, or put a different way, municipal assets of high quality that in times of crisis probably could be sold, whether that requires a decent haircut for selling is 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 is 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 substance, it's the right move. this is a very high haircut. ironically, if you go back in time and reran this test, enron debt would have qualified as high-quality and liquid asset well into 2002, but, you know, the state of new york or new york revenue bonds dedicated by separate revenue might not have. so congress is wise to but municipalities on parity with corporate debt here. the third thing i like is section 401 which raises the threshold. i want to get back to the debate about not what the number should be, but to understand why $50 billion should be changed, you have to understand what the logic was when we put $50 billion into dodd/frank. and go back to the 2009 mindset. it's a very different mindset. a set of banks subject to stronger regulation, the concept

at the time was that we were really concerned this would be giving the government the idea that these banks were too big to fail. it would actually be an advantage to be one of these banks. policy makers would be concerned that markets would interpret if you were a sify bank that the government stood behind you. this was in 2009 where it wasn't clear what banks were stable or not. we said, well, let's set the line so low it's clear if one of these smaller banks fail, the government wouldn't step in and provide extraordinary assistance. so the market wouldn't really know where this extraordinary assistance line was. and that was the dominant rationale for setting a $350 billion limit. a decade later, one of the concerns that became clear is the concerns about moral hazard are no longer valid and may have been overstated at the time. research has shown there is no benefit to this being over $50

billion. in fact, there is more regulatory cost. there is no rush among financial institutions to grow above the $50 billion threshold in the market. it's time to re-examine that. in addition, the number was hard,wired, doesn't grow with inflation, assets, the economy, so in real terms it shrinks over time. and as dr. norbert said, there is a catch-all that the federal reserve has authority if they see a bank engaged in risky activities or throughout the correlated set of institutions engaged, they can still apply enhanced prudential standards. so it's not a complete walkaway. that tunnels necessarily mean i think the statute is exactly right as threaten. the federal reserve's authority may be hemmed in a little bit. reasonable people can argue whether 250 is the right line or whether or not to have a hardline at all. as it's written at 249, the fed

could decide to not to provide additional standards and all of a sudden you're in as your systemic risk profile really changed? three things i don't like. one, there should be something in here for consumers. we've seen multiple major scandals within the financial services industry. what equifax has happened in terms of data breach has exposed not just problems there but with underlying economics of credit reporting. one out of four people have an error on their credit report. there are many aaron kleins out there, not all of whom pay their debts. try getting your credit report fixed. there is no legal requirement there be any accuracy in your credit report. beyond which, the system and the economics within credit reporting don't favor fixing it. there should be something in there to address this. there should be something in here to address some of the problems uncovered in the wells fargo scandal. other major deregulation 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 new businesses. more access to credit for new businesses. coupled with that, it would nice if this were the end. one of the things that 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 there -- i don't feel an acceptance that a modified framework is enough to put this issue to bed and move on. we can't constantly be relitigating the response to the last financial crisis. we have to put in place a new framework and see how it goes. and, you know, acting cfpb director mulvaney last week called this a beachhead. from my perspective, this is the end of the set of changes, not the beginning. second thing i don't like is

section 402, this is the treatment of custodial assets. without getting too complex, a ratio and a risk-weighted ratio. i call it the chop sticks approach to financial regulation. with two chop sticks, you can eat anything elegantly, with one, you're stabbing at it. i don't like one simple leverage ratio or just using risk-weighted. but the simple leverage ratio is that it's simple. it takes one activity and says this is so safe we don't need it to be part of the simple leverage ratio. okay, maybe. if you really believe that, then do it for the entire activity. but what the section of the bill does is it exempts only three institutions who do kustodial assets 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 systematically -- increased systemic risk. that's not the goal of the bill. so i think there are two logical places to go to fix that. one is eliminate it and keep the simple leverage ratio simple. that's my preference. two is, if policymakers want to kick this out of the ratio, kick it out for everyone. we kind of ended up at the worst of both possible outcomes. and the last problem i have with the bill is that removal of the disclosure for about 4,000 financial institutions to report data that's been reported for years on racial -- racial information on home mortgages. you know, look, it's a horrible thing to say, but it's true, there is still racism in

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

commodicredit -- commodity tiesation and securitization of credit to occur more easily. small banks know their community and can make these loans to people that go, you know what, for whatever reason you don't fit this big box. perhaps it's because there is something wrong on your credit report, but we're going to provide you credit. that's fantastic. that provides a new value of opportunity. that should work jsympatically. those are my thoughts. thanks very much having me. >> thank you, aaron. thank you for the segue. speaking of small banks -- >> great, i'm glad to be here. i'm very excited about the bill being on the senate floor this week. the best thing about this bill is that it's a bill that can

pass the senate and pass with 60-plus votes. we've seen very few bills that attract this kind of bipartisan support. the vast majority of banks in this country are community banks. there are about 5,700 banks in the country right now, commercial banks. 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 banks. and let me just say from the beginning, we're not looking at regulatory relief for the sake of changing some regulations. there is a broader purpose for this legislation. the purpose is not tweaking a few regulations or changing an

ass asset threshold on very complex regulations, 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 banks that are trillion-dollar banks to banks that are $50 million banks. what this bill is attempting 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 lend in their local markets. since dodd/frank passed, we had many of our banks drop out of the morning 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 morning lending space. so keep those community banks in mortgage lending. if you're only 50 or 100 mortgages a year as a community bank and 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 kind of 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 and you have great systemic risk. so 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 life blood of many communities. there are thousands of counties around the country where the only physical presence bank is a community bank. so 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 on the humda data. the bill is only addressing new

humda 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 under humda. the cfpb took that and added about 20 more to it. so what the legislation is doing is all the existing humda reporting on mornings is there so there is not going to be any new discrimination or anything as claimed. what it's 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. it was overkill on new data reporting. banks don't want to spend their entire day collecting and reporting data that is used against them if they miss a comma are have something inaccurate in their mortgage documentations then they're attacked for that.

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

bill. i have identified nine items, all of which would improve the regulatory environment for entrepreneurs seeking to raise capital. seven of them have passed the house on a bipartisan basis. in some cases unanimously. and then two others. so let me just quickly run through the nine items that should be included in this bill and really shouldn't be that controversial and should be able to achieve bipartisan consensus. introduced legislation regarded to accredited investors. passed the house november 1st by voice vote. what it would do would be to set the monetary thresholds for determining who is and who is not an accredited investor at the current regulatory levels

but by statute and then broaden it in two respects. one, brokers, so-called, would -- by which he really means registered representatives, people working for brokerage firms, would be able to invest in private placements with -- and then also gives the s.e.c. the authority it already has to broaden the definition of a credit investor under regulation d. regulation d nofor those of you who are not familiar with it, the safe harbor provided by the s.e.c. back in 1982 that if you meet the tests, set forth in regulation d, your offering will be treated as a private placement, therefore you will not have to file a registration statement and go public. filing a registration statement costs roughly $1.5 million in lawyers and accountants and other fees. so it basically is something that is not available to smaller

companies. so -- and also at this point, i believe the latest data shows that regulation d about $1.5 trillion is raised every year in this country. it's actually larger than the public markets in terms of new capital raises. it is the most important way we raise capital. there is a -- what i would consider a drafting error in the bill that should get fixed. broker under the securities laws means merrill lynch, not the people that work for merrill lynch, but they clearly need to allow the individuals that work for merrill lynch to be the ones that can invest in these placements because almost every broker, if not every broker, would meet the institutional requirements under reg d anyway. the next is the small business mergers acquisition sales and simplification act, which is really the business broker bill introduced by representative --

h.r. 477. it passed the house in december by a close margin, 426-0. basically what this bill would do would say that business brokers who basically serve as intermediaries when the dry cleaner sells the entire business to a new buyer or a local hardware store sells the entire business to a new buyer, doesn't have to register as a broker deal and be subjected to the same regulatory regime as merrill lynch. it obviously has very broad support. it passed the house this congress and last congress. the senate has never taken it up. it's time the senate did. the next is improve pentaging a capital act. h.r. 2864 which passed the house in september by a vote of 403-3. basically what that bill does is

allow registered companies, public companies to use regulation a-plus. the s.e.c. and its -- the s.e.c. made a mistake and prohibited that for no good reason. the regulatory disclosure requirements for public companies are much more stringent than regulation "a" so there is nothing lost in you allow the public companies which have to provide a great deal of information to use regulation "a." which is why it passed with only three dissenting votes. the small business capital formation enhancement act introduc introduced, h.r. 1312. again, another very controversial bill that passed the house by a vote of 406-0. in may of last year. is one of the sort of good government bills. in $1980, congress require the s.e.c. to hold an annual

conference on small business capital formation. every year, people from around the country gather and make recommendations to the s.e.c. about how they can improve the regulatory environment. every year, most of the s.e.c. commissioners come to it and explain how important small business capital formation is, then they go away for the next 364 days and do nothing. then they come back with the next one and say how important small business capital formation is. that's been going on for 35 years. every once in awhile they to something, but it's fairly rare. the congressman's bill is relatively straightforward. it's a procedural-type bill. it requires the s.e.c. to actually respond to any recommendation made by this small business forum which is depending 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 helping angels lead our start-ups act. for those of you who are sort of familiar with the entrepreneurial culture in particularly the west coast but also some other places, they often hold these forums where angel investors, meaning people who are accredited investors can invest in these start-ups come and there might be 50 or 100 in the room. the entrepreneur come misand makes his ten, 20-minute pitch and then they move on. and they just cycle through. and under most east coast interpretations of the securities laws, that would be an illegal general solicitation. yet it goes on. what the h.a.l.o. act is set up a series of criteria allowing angel groups, not for profits like universities and so on and so forth to hold these events

and forum so start-up entrepreneurs can make their pitch to potential investors in this environment without going against the general solicitation rules. it's a carveout for the general solicitation rules. it's actually something i think that could be useful and important. it was introduced by congressman chabot, h.r. 79. it passed the house in january of the 2017. the senate has done nothing on it. it passed the house by a vote of 344-73, again, a bipartisan piece of legislation. another piece of legislation that passed the house by a vote of 419-0 is the encouraging public offerings act. h.r. 3903. what it does is extend the job's act provisions related 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 in agc for five years to all issuers. so it would basically allow people to test the waters, meaning discuss the -- an offering with potential investors without making an offer to get a sense of what they could actually sell the securities for and make confidential filings with the s.e.c. before they do their full-blown public offering. and, again, that passed 419-0. it seems like it is something that the senate should take up because it would make it much easier for entrepreneurs to raise capital and accurately price their offings. two other bills in my judgement that deserve serious congratulations is themicro offering safe harbor act. h.r. 2201. it passed the house in november.

by a significant marge. -- margarin. but it wasn't unanimous with the other legislation. what that bill does is basically stand for the proposition that extremely small offings under $500,000, 35 or fewer purchasers or entirely to people with whom have a substantive pre-existing relationship with is a securities term that has been around for a long time. you don't have to register and become a public company and spend the $1.5 million on lawyers. the original legislation basically said it's "a," "b" or "c." the legislation passed by the white house was "a," "b" and "c." so it's a very narrow bill in its current formation because

you have to be under $500,000 have fewer than 35 purchasers and have a substantial pre-existing relationship with all the purchasers. where as the original legislation, in my judgement much better, would have been any of those three, not all of those three. that legislation deserves serious consideration by the senate. and the last is a piece of legislation, again, by congresswoman cinema, that has been reported out of the house financial services committee but not adopted by the entire house. it was reported out just after thanksgiving. what it would do would be to extend for five years the emerging growth company exemption from oxleys internal controls reporting regime under section 404-b. that all sounds highly technical, but that is an extraordinarily expensive aspect of being a public company.

in the small firm context really is just a waste of money to the enrichment of the 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 start-up companies seeking to raise capital or small companies seeking to go public, and the senate really should take these things up. >> thank you, david. just for the little bit of perspective, there is a -- pretty much a delicate balance right now with the senate's, i guess we would call it bipartisan agreement, but everything that everybody that i know of has been talking about is that if 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 the -- especially on the things that david is talking about. these are things that have

passed the house unanimously or voice vote, things like that. they're very much open to doing things that are not controversial because of that. so that -- 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 then before we talk about that process, i'll just get my three things in there, my wish list for changes really fast. one is on the muni provision that aaron was discussing. aaron and i see this one a little bit differently, which is fine. my view is that if you're going to have the liquidity coverage ratio, it is about liquid assets, as in cash. if you look at the liquidity coverage ratio about cash in and out, therefore while aaron's correct that some of these things might just be fine in a crisis, we really don't know that, but we do know that about cash and probably treasury

securities and nothing else. in my view, if we're talking about cash and just cash then we should stop there. think they got it right the first time. i don't think they should go back. that's just -- that's a little bit different but that's my view on that one. the second one that i would like to see changed is the -- on policies -- the reciprocal deposit provision. i would like to -- if you're going to have a limited exception for reciprocal deposits as not being brokered, okay, if it's very limited, i can get on board 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 that it should be changed so that it's not just a reciprocal deposit, it should be some other third-party-type funding arrangements. some custodials should be in there. the percentages should be dropped. as written, it's 20% of total liabilities and i don't see any reason why it should be that

high. i'd be much more comfortable with something like 10 or 5 and all of these numbers are arbitrary, but the point is that it should be limited and the more limited the better. and then my last one, which -- and actually, paul, i'd love to get your thoughts on this one. my last one is i'd like to see the leverage ratio changed, the community bank leverage ratio. there is a lot of regulatory discretion here, and in my view, it would be better to pair some of that back. one way of doing that, i think that -- i think should garner a good deal of support is to adopt or amend a proposal from 2015. what you would end up with is essentially a four-part test. instead of having it the way we have it now where the bank could meet the asset threshold, meet the leverage ratio and still not qualify for regulatory relief, instead, instead, what you would have is if a bank meets the leverage ratio, meets the asset

requirements, has zero trading assets or liabilities or some other factor, no positions in dri derivatives other tran interest rates and foreign exchange derivatives and has a minimal derivative exposure, maybe $8 billion, one used in previous margin rules, but i'm flexible on that, if you meet that four-part test then you're out. in other words, then you qualify. if not, then the regulator can still have discretion on a risk profile, but at least there is a clear -- a 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 -- that's my wish list. i don't know. >> right. well, there is a lot of changes that could be done to the bill, but, you know, being at a think

tank we're talking policy, but you 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 to address dodd/frank have been, you know, from republicans or democrats. here is a bill that's been carefully crafted and balanced to get 60-plus votes, to have over 13 democrats supporting the bill so you get a filibuster-proof majority. there are all kinds of great changes that could be made to the bill. i hope some of them could be included in the final passage, the internal controls, very expensive for banks to do those and it's kind of, you know, double auditing them. bank regulators of all kinds are

in the banks making sure their books are accurate and then 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 and reassessment of dodd/frank rules. if this doesn't get traction in the senate and pass in the senate, think we'll be in the desert a long time wandering around saying, hey, why didn't we take something that was very good and could get 60 votes and if this passes in a bipartisan way, i think it's going to open up negotiations to do even more in the future. >> so that's exactly my concern. right? this shouldn't -- this shouldn't be -- this should be the deal, right? we fixed -- the threshold

shouldn't be continually be raised. we can't keep continually going back at it. >> there is no law that is ever permanent. look at the tax code. you keep changing the tax code. talk about we're going to make these tax cuts permanent. there is no such thing. >> there are two distinctions, the tax code process -- the tax code process has been an unmitigated debacle and exactly why the process followed in this bill was far better. the constant sunsetting of that is budget gimmicks, much like the budget gimmick the congress is doing with the federal reserve surplus in the banking space. bank regulation, letting politics dominate in bank regulation leads to policy errors that tend to make us all worse off. that's what i'm concerned about this custodial thing. as you point out, the politically stable solution seems to be just do a carveout for these three because they're the ones who care about this the most. if you do it for everybody, you're benefitting big banks and that's politically challenging. if you do it for no one, then

you aren't addressing this core issue, but government is picking winners and losers and could end up making 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 risk-based capital. i kind of like both. the chop sticks approach. where we may find more common ground is a regulatory approach that allows banks to innovate, take risks and fail. we have 6,000 banks in america. if you had a city that had 6,000 restaurants and you came back in a year and all 6,000 restaurants were still there, that's not the mark of a healthy economy. right? we ought to be in a situation where banks are businesses. they come up with new ideas, they test new ideas, they challenge, they fail. the period in american history with 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 competition and is comfortable with fail oaure. 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 it's their job that nobody should fail under their watch. >> now i want to have another event with you and talk about risk-based capital, but we can't do that right now, but i'm encouraged to hear you say that because i agree. i think that you're exactly right. we don't want to let banks fail and that's a terrible mistake. so that not withstanding, before we get to some q&a, just to keep things moving along, let me just go down and see if anybody has any thoughts on how this process might unfold now in the coming weeks. whether we're going to look at some kind of conference or quasi

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

the house i think wants to pass something as well, but has always been stymied by the senate and that 60-vote threshold. think at the end of the day even if the house takes just the senate-passed bill and passes that we'll be in much better shape than getting nothing at all on rolling back dodd/frank. >> i'm not -- i'm sort of agnostic on how the whole thing will proceed, but i can say with some degree of confidence that for at least the last two conferences, the way the capital markets bills usually happen is the house pass them on a bipartisan basis and the senate aseeds to an miami-dade in tame conference committee. if there is no floor amendment, i would hope we would have a repeat of that process where these really noncontroversial or broadly supported bills are included as part of the final

legislation that's reported out of the conference committee. >> so it's a little bit unclear, i think, what this process will be on the floor. there is a lot of talk of including new provisions in the so-called manager's package that could be some of the capital market things that have come out of the house. there could be some other ideas. this equifax issue i think resonates broadly, and if congress is going to only have one crack over two years to actually handle firearm services, firearm -- financial serves,it would be a shame if one area that impacted more consumers than any other area -- congress responds to scandals. we didn't get dodd/frank because they sat around thinking about an optimal new bank regulatory structure, we got it because the entire financial systems industry blew itself up. i think there will be something on credit reporting agencies, i would hope. whether the house passes

something different, i don't know. i would point out one of the hallmarks in transparency in -- believe it or not, an open conference, televised live on c-span. i can't recall another bill that i've ever worked on in my 15 years in washington that had an open-door conference. usually one of the conference committee between the house and the senate meets once to vote upon the deal that they agreed to. maybe they meet twice to open the conference and then close it. this was one in which you could stay up to 3:00 in the morning watching members cast live votes on complex issues in front of the cameras. i think transparency is very important in financial regulation. it's complicated. the details that we've gone through in this legislation are not easy. part of our job as public thinkers on this is to explain it for people to make up their own mind, but i hope there continues to be a transparent process in this bill going forward. >> i second that hope. i don't know that -- my gut feeling is that it's not, but -- it's not going that way, but

we'll find out, i guess. maybe some of it this week. well, that concludes our planned segment up here. and we can open up -- we have some time to do some question and answers if anybody in the audience wants to ask. please -- we have a microphone, just state your name and affiliation if you would. >> steve perkins, i'm an angel investor, but i actually have a slightly different question. i believe paul is right that we really have to consider political reality in this bill, and i think one of the things that the democrats are going to fight against is eliminating the cfpb. there has to be something like the cfpb or they are not going to vote for this, in my opinion. so i wonder, and i know heritage has certainly recommended eliminating that completely, but what else can there be? there have to be some provisions in this bill that will address some of the consumer concerns like equifax. i'm one of those that lost my information in the equifax data

breach. so, you know, i'm concerned about that and 150 million other people are also. so i'm wondering how can that kind of consumer issue be built into this bill? >> that's a very good point. there has always been consumer laws and consumer protections in the fireanancial services secto. they used to be largely housed at the federal reserve and after dodd/frank they were moved to a whole new agency, the cfpb. you can debate the structure of the cfpb and how it should be structured, should it have a single director? what we've advocated for since dodd/frank is to have a bipartisan commission run the cfpb so it's not just, you know, one individual that has tremendous authority over consumer regs. i think that can be structured much better there, but there is no roinelimination of the cfpb

here. as a matter of fact, i think there are a lot of rules and regulations that the cfpb have been put in post the financial crisis that are hurting and harming consumers. we talked a little bit about mortgage lindinending. many of our community bankers have gotten out of the mortgage lending business. they do small volumes in some cases. the rules and regulations coming out of the cfpb on qualified mortgage and ability to repay is really hurting the consumer. so i think this bill does a little bit to refocus on helping the consumer. and as i said at the beginning, we're not doing this bill, we're not pushing this to reduce regulations on banks. that, you know, 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% of all agricultural loans are done by community banks. nearly 60% of all small business

loans are done by community banks. and we only represent 20% of the industry assets. if you compare us to, you know, the trillion-dollar, $2 trillion largest wall street international banks, we're a small segment of the banking sector overall, but we're very important. so these -- these rules are really about helping the consumer. >> so i think as a political reality, one of the deals cut in this legislation was not to directly address the cfpb. there is almost nothing in this legislation that directly addresses the cfpb in terms of structure, funding, et cetera. however, unfortunately, and this is one of my criticisms, there is going to be something in the congressional appropriations bill that guts the cfpb's end funding. that's going to not be enacted into law because of the threat of the democratic filibuster. we're not putting aside and moving on these questions. the office of the controller of the 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. abraham lincoln. it has a single agency director. we seem to have not -- i've not seen many debates about whether we should have a controller of the currency, whether there should be a board or not. we've moved on from that, which is a good thing. we shouldn't be debating the lincoln-era approach to bank regulation anymore today than we should have moved on from the bureau. with regard to the qualified mortgages, which do get touched on this point as mikele described within this bill, this is a subset of the rules.

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