What is the Crapo Bill?
The term Crapo bill refers to an economic bill signed into law in 2018 that loosens some of the Dodd-Frank Act restrictions on Wall Street reform and consumer protection. The bill, officially called the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2115), was sponsored by Mike Crapo, a U.S. Senator (R-ID) and Chairman of the Senate Banking Committee, and passed by the Senate by a margin of 67 to 31 in March 2018.
Some of the changes introduced by the banking bill include raising the asset threshold for banks deemed too big to fail as well as requirements for community banks. The bill was approved and signed by former President Donald Trump in May 2018.
Key points to remember
- The Crapo bill is an economic and banking bill that relaxes some of the Dodd-Frank Act restrictions on Wall Street reform and consumer protection.
- The bill was introduced in 2017 and signed into law by President Donald Trump in May 2018.
- The bill raised the threshold for banks deemed too big to fail from $50 billion to $250 billion.
- It also eliminates the Volcker Rule and improves loan terms for mortgage borrowers, veterans and student borrowers.
Understanding the Crapo Bill
The Dodd-Frank Act was passed in 2010 following the financial crisis of 2007-2008.It consolidated the number of regulators responsible for financial oversight, increased the amount of capital banks had to retain to guard against market downturns, and demanded improved standards and levels of transparency. Although it was designed to provide relief to consumers, it was met with a lot of resistance. Critics said the restrictions weighed on banks and other financial institutions by adding more red tape and unnecessary regulations.
The Economic Growth, Regulatory Relief, and Consumer Protection Act, or Crapo bill, was introduced by Republican Senator Mike Crapo of Idaho in November 2017 and became law after it was signed by the President Trump on May 24, 2018.The main purpose of the bill is to roll back some of the regulations put in place by Dodd-Frank. Its main objective is to increase the asset thresholds that banks must meet before being subject to certain regulations and supervision.
The Dodd-Frank threshold was set at $50 billion, above which banks would be considered too big to fail.The Crapo bill raised that threshold to $250 billion in assets, which only a relatively small number of banks, including Bank of America, Wells Fargo and JP Morgan Chase, would exceed.While the legislation has been sold as a way to help community banks, several mid-sized banks stand to benefit as well.
But that’s not all. Other key elements of the bill include eliminating the Volcker rule for institutions with assets of less than $10 billion.This section of the Dodd-Frank Act prevented banks from undertaking certain activities with their own investment accounts and from dealing with hedge funds and private equity funds. The bill also promises to improve access to mortgages for consumers, increase protections for veteran and student borrowers, and improve capital creation.
Although the Crapo bill eliminates and amends parts of the Dodd-Frank Act, it does not repeal it entirely.
Special Considerations
Banks that do not meet the $250 billion threshold will eventually be exempt from the stress tests administered by the Federal Reserve Board. These tests are designed to estimate the impact that a financial shock would have on a bank based on its risk exposure and reserves. In addition, these banks would no longer be required to provide an outline of how they would be liquidated in the event of bankruptcy.
Although the Crapo bill raises the threshold for banks deemed too big to fail, it also extends some authority to the Federal Reserve when it comes to smaller institutions. According to section 401 of the bill, the Fed may, at its discretion, consider imposing the same restrictions as the big banks on institutions with assets not exceeding $100 billion.
Criticism of the Crapo Bill
Dodd-Frank has been repeatedly criticized by the financial industry. Banks lobbied hard to reduce capital and reporting requirements which they saw as costly and onerous, but the proposed legislation tended to lack bipartisan support. This was often due to legislation focused on dismantling the Consumer Financial Protection Bureau (CFPB).
Part of Dodd-Frank — the creation of the CFPB — had long irked some members of Congress as well as financial firms. The CFPB was designed to protect consumers from predatory and fraudulent practices by banks, lenders and other financial institutions. The agency could also levy fines if these institutions are found to be taking advantage of consumers. Because its budget is controlled by the Federal Reserve, supporters say it has been shielded from congressional interference. Opponents say this led the CFPB to go too far.
Unlike previous attempts, the Crapo bill focused on relaxing banking rules. However, critics of the Crapo bill argue that reducing the number of banks subject to stricter supervision will increase the chances that banks will fail during a financial crisis in the future. They also point out that data collection requirements for mortgages would be relaxed, allowing smaller banks and credit unions to avoid having to report this data.