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Friday, December 9, 2016

April 29 (Bloomberg) — A year ago, the big U.S. banks were focused on repealing, or at least eliminating large parts of, the Dodd-Frank financial-reform law.

They poured money into the campaign of the Republican presidential nominee, Mitt Romney, and gave generously to opponents of pro-reform Senate candidates Sherrod Brown and Elizabeth Warren. At the same time, lobbyists devised creative tactics to delay implementation of Dodd-Frank — filing lawsuits, mobilizing international pressure, hiring former regulators, writing opinion articles and comment letters, and commissioning faux research pieces. It was a tour de force by one of the great lobbies at the top of its game.

And it failed.

On April 23, I attended a forum organized by American Banker, a trade publication, to discuss the legislative proposal crafted by Brown, an Ohio Democrat, and Senator David Vitter, a Louisiana Republican. In attendance was a Who’s Who of the industry lobby, with all the major groups represented at a senior level, including the Financial Services Forum, the Clearing House and the American Bankers Association.

They let it be known that the line from big banks and their allies had shifted and that their new refrain is “let’s implement Dodd-Frank.”

This sounds like a significant change in rhetoric, but don’t fall for it. The reality remains the same — a very powerful lobby is working flat-out to ensure that the industry keeps its dangerous, nontransparent and unfair subsidies. Yet the winds are shifting against the megabanks for three main reasons.

First, the Brown-Vitter legislation, which was introduced April 24, changes everything. The news isn’t that Brown wants to make the financial system safer. That has been a top priority of his since the spring of 2010, when he co-wrote the Brown-Kaufman amendment, which would have imposed a binding size cap on the largest banks. (It failed on the Senate floor.)

Now, however, he has a Republican co-sponsor, and they have converged on a strong message. Vitter, who is on the right of the political spectrum, articulates well the case for ending the implicit subsidies that exist because creditors understand that the government and the Federal Reserve won’t allow a megabank to fail. This broad and sensible message resonates across the political spectrum.

Second, small banks are increasingly focused on the ways megabanks have achieved an unfair competitive advantage — primarily through implicit government subsidies.

The most compelling voice at the forum last week was Terry Jorde, a senior executive vice president of the Independent Community Bankers of America. She made clear that small banks are being undermined by the reckless behavior of megabanks that are seen as “too big to fail.” There is no market at work here, just a hugely unfair and inefficient government-subsidy scheme. The U.S. economy wasn’t built on megabanks and there is no good reason to continue to accept the risks they pose.

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