Derisively described by critics as “Obamacare for the financial sector,” the Dodd-Frank Act is persistently targeted for repeal by Congressional Republicans in much the same way as healthcare reform. If you thought another full-throttle attack on the 2010 legislation might be on hold until November’s elections map out new political realities, you were wrong.
One of the most vigorous assaults yet came on June 7 from House Financial Services Committee Chairman Jeb Hensarling (R-TX). During a speech at the Economic Club of New York, he unveiled details of the Financial CHOICE Act, a Republican plan “to replace the Dodd-Frank Act and promote economic growth.” The acronym stands for Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs.
The Financial CHOICE Act, slated to be formally introduced as legislation later this month, “will end taxpayer-funded bailouts of large financial institutions; relieve banks that elect to be strongly capitalized from growth-strangling regulation that slows the economy and harms consumers; and impose tougher penalties on those who commit fraud as well as greater accountability on Washington regulators,” Hensarling says.
He described Dodd-Frank “a grave mistake” and lamented that one of its centerpieces, the Volcker rule, a ban on proprietary trading by banks, “was unnecessary” and “has made capital markets less liquid and more fragile and undermined financial stability.”
To end taxpayer-funded bailouts and “too big to fail,” the legislation seeks to create a new sub-chapter of the Bankruptcy Code tailored to specifically address the failure of large, complex institutions. The legislative package also includes more than two dozen measures to provide additional regulatory relief.
“It is clear that Congressman Hensarling and his fellow republicans think that the poor Wall Street banks have suffered too much under the new rules and it is time for them to return to the good old days before the 2008 crisis when they could run wild.”
Sen. Elizabeth Warren (D-Mass.)
Among other things, the legislation would:
Provide an “off-ramp” from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards for banks that choose to maintain high levels of capital
Exempt banks that have made a qualifying capital election from any federal law, rule, or regulation that provide limitations on mergers, consolidations, or acquisitions of assets or control, to the extent the limitations relate to capital or liquidity standards or concentrations of deposits or assets
Retroactively repeal the authority of the Financial Stability Oversight Council to designate firms as systematically important financial institutions
Repeal Title II of Dodd-Frank and replace it with a new chapter of the Bankruptcy code designed to accommodate the failure of a large, complex financial institution
Change the name of the CFPB to the “Consumer Financial Opportunity Commission” and task it with the dual mission of consumer protection and competitive markets
Replace the CFPB’s single director with a bipartisan, five-member commission subject to congressional oversight and appropriations
Make all financial regulatory agencies bipartisan commissions and place them on the Congressional appropriations process
Repeal the Chevron deference doctrine
End Securities and Exchange Commission administrative proceedings
Allow the SEC to triple the monetary fines sought in both administrative and civil actions in cases where the penalties are tied to the defendant’s illegal profits
Require that all fines collected by the Public Company Accounting Oversight Board and Municipal Securities Rulemaking Board be remitted to the Treasury for deficit reduction
Repeal sections and titles of Dodd-Frank, including the Volcker Rule, that limit capital formation
Repeal the SEC’s authority to eliminate or restrict securities arbitration
Repeal non-material, specialized disclosures
The legislation also demands the passage of nearly four dozen Committee or House-passed capital formation and regulatory relief bills.
“When they voted for it, supporters of Dodd-Frank told us it would ‘promote financial stability,’ ‘end too big to fail,’ and ‘lift the economy.’ None of this has come to pass,” Hensarling said. “Today the big banks are bigger and the small banks are fewer. Even more banking assets are now concentrated in the so-called ‘Too Big to Fail’ firms. Pray tell, how does this promote financial stability?”
Hensarling elaborated on how banks, under his proposal, will reduce their regulatory burden through “a market-based, equity financed Dodd-Frank off-ramp.”
“To avail themselves of this exchange, many larger banks will have to raise significant additional equity capital,” he said. “Most community banks will have to raise little to no additional capital. The option remains with the bank.” Under the plan, banks that maintain a leverage ratio of at least 10 percent and have a composite CAMELS rating (from a six-factor, international bank-rating system) of 1 or 2 may elect to be functionally exempt from the post-Dodd-Frank supervisory regime, Basel III capital and liquidity standards, and other regulatory mandates that pre-date Dodd-Frank.
Any bank that chooses to maintain a 10 percent leverage ratio in order to qualify for regulatory relief under his plan will be “significantly better capitalized than Dodd-Frank or any U.S. or global regulator currently requires them to be,” Hensarling said. Under the Basel accords, banks must maintain at least a 3 percent leverage ratio, and U.S. prudential regulators require 6 percent for those considered globally systematically important. The estimate is that U.S. banks currently identified by regulators as G-SIBs will need to raise several hundred billion dollars in new equity to qualify for regulatory relief under the plan, assuming their asset size remains constant.
THE ATTCK ON DODD-FRANK
The following is a breakdown of the Financial CHOICE Act.
Section one
Provide an “off-ramp” from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards for banking organizations that choose to maintain high levels of capital.
Permit banking agencies to conduct stress tests of a banking organization that has made a qualifying capital election. Require that the different sets of conditions under which stress tests are evaluated be made public and subject to notice and comment period.
Exempt banking organizations that have made a qualifying capital election from any federal law, rule, or regulation that provide limitations on mergers, consolidations, or acquisitions of assets or control, to the extent the limitations relate to capital or liquidity standards or concentrations of deposits or assets.
Section two
Retroactively repeal the authority of the Financial Stability Oversight Council to designate firms as systematically important financial institutions.
Repeal Title II of Dodd-Frank and replace it with a new chapter of the Bankruptcy code designed to accommodate the failure of a large, complex financial institution.
Repeal Title VIII of the Dodd-Frank Act, which gives the FSOC authority to designate certain payments and clearing organizations as systemically important “financial market utilities” with access to the Federal Reserve discount window, and retroactively repeal all previous FMU designations.
Prohibit use of the Exchange Stabilization Fund to bailout financial firms or creditors.
Repeal Dodd-Frank’s so-called “Hotel California” provision [a derogatory term for the process a firm must take to be un-designated as a systemically important financial institution).
Section three
Change the name of the CFPB to the “Consumer Financial Opportunity Commission (CFOC),” and task it with the dual mission of consumer protection and competitive markets, with a cost-benefit analysis of rules performed by an Office of Economic Analysis.
Replace the current single director with a bipartisan, five-member commission which is subject to congressional oversight and appropriations.
Establish an independent, Senate-confirmed Inspector General.
Require the Commission obtain permission before collecting personally identifiable information on consumers.
Repeal authority to ban bank products or services it deems “abusive” and its authority to prohibit arbitration.
Repeal indirect auto lending guidance.
Section four
Make all financial regulatory agencies subject to the REINS Act, bi-partisan commissions, and place them on the appropriations process so that Congress can exercise proper oversight.
Impose an across-the-board requirement that all financial regulators conduct a detailed cost-benefit analysis of all proposed regulations.
Reauthorize the Securities and Exchange Commission (SEC) for a period of five years with funding, structural, and enforcement reforms.
Repeal the so-called Chevron deference doctrine.
Effectively end SEC administrative proceedings.
Section five
Impose enhanced penalties for financial fraud and self-dealing and promote greater transparency and accountability in the civil enforcement process.
Allow the SEC to triple the monetary fines sought in both administrative and civil actions in certain cases where the penalties are tied to the defendant’s illegal profits.
Give the SEC new authority to impose sanctions equal to investor losses in cases involving “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.”
Increase the maximum criminal fines for individuals and firms that engage in insider trading and other corrupt practices.
All fines collected by the Public Company Accounting Oversight Board and Municipal Securities Rulemaking Board will be remitted to the Treasury for deficit reduction.
Section six
Repeal sections and titles of Dodd-Frank, including the Volcker Rule, that limit capital formation.
Repeal the SEC’s authority to eliminate or restrict securities arbitration.
Repeal non-material specialized disclosures.
The legislation also demands the passage of nearly four dozen Committee or House-passed capital formation bills and regulatory relief bills for community financial institutions.
Source: House Financial Services Committee
The leverage ratio is essentially the same as the “Supplementary Leverage Ratio” regulators implemented post-Dodd-Frank, “a more stringent measure of capital adequacy than the Basel risk-based capital regime traditionally favored by global banking regulators and more stringent than using the GAAP leverage ratio. Risk-weighting is simply not as effective,” he said.
In what is an assumed coincidence, on the same day Hensarling unveiled his legislative package, the Senate Banking Committee held a hearing on bank capital and liquidity regulations. It provided a forum for Dodd-Frank champion and CFPB architect Sen. Elizabeth Warren (D-Mass.) to take the Republican’s plan to task, calling it a “wet kiss for the Wall Street banks.”
“It is clear that Congressman Hensarling and his fellow republicans think that the poor Wall Street banks have suffered too much under the new rules and it is time for them to return to the good old days before the 2008 crisis when they could run wild,” she said.
Warren took umbrage at the proposal to repeal the FSOC’s ability to designate financial firms as SIFIs. “Apparently Congressman Hensarling thinks you can stop ‘too big to fail’ simply by preventing regulators from calling firms ‘too big to fail.’ I don’t think that is actually how it works,” she said.
Increasing Congressional oversight of financial regulators was also problematic in Warren’s view. “They have been independently funded since they were created,” she said. “The idea was to keep politicians from interfering by threatening to cut off a regulator budget when the regulator tried to clamp down on a politically powerful bank.” Under the proposal, “the bank regulatory process will be subject to more political meddling.”
Similarly, Warren said, subjecting any new, major financial rule to a second vote in Congress, is “effectively giving Congressional republicans he ability to block any rule that they or their friends on Wall Street don’t like.”
Sen. Sherrod Brown (D-N.Y.) sees more regulatory work as needed, not a pullback. “Last week’s announcement that the Federal Reserve will raise the capital levels for the largest banks to pass its stress tests indicate that it, as a whole, thinks there is more work to be done,” he said. “Experts on the left and on the right agree that capital is an element of financial stability. Capital lessens the likelihood that an institution will fail, lowers the cost to the financial system, and, most importantly, lowers the cost to the economy if it does.”
Requiring the largest banks to fund themselves with more equity provides them with a choice. “They can ether fully internalize the risk they pose to the economy, or they can become smaller and simpler,” he said. “Banks have argued, and will continue to argue, that making them hold more equity will reduce lending and cause the economy to contract. But banks have a range of options to meet new standards in ways that do not limit lending, including seeking out equity investments, retaining earnings, limiting dividends, stock repurchases, and curtailing bonuses.”
Living will results show that several of large banks will have deficiencies and shortcomings in their capital and liquidity and “most of them could not fail without threatening our financial system,” Brown added. “That’s why we have these regulations. It is why we shouldn’t fight to preserve the status quo, we also need to move forward. We need stronger, simpler rules that can’t be gamed by Wall Street economists or watered down by lobbyists. Unfortunately, too many of the efforts we see in Congress right now are intended to undermine and roll back regulation, as though we have forgotten what happened in 2007 and 2008.”
There are very few in Congress, left or right, “that want to see banks without regulations,” said Sen. Mike Rounds (D-S.D.). “I have never talked to a single bank that doesn’t think regulations aren’t important. They want a fair playing field. We all want to see a stable series of financial institutions of all sizes.”
Rounds chastised Congress for treating the Dodd-Frank Act as either sacrosanct or something regulators should be left to adapt. “We have a huge series of rules and, over a period of now six years, we haven’t seen changes to them,” he said. “We have simply expected that regulators would make the changes. It looks to me that we haven’t done our job to come back in and look at a regulatory framework that should be tweaked.”
Professor Hal Scott—director of the Program on International Financial Systems at Harvard Law School and director of the Committee on Capital Markets Regulation, a bipartisan organization dedicated to enhancing the competitiveness of U.S. capital markets and ensuring financial system stability—was among the experts testifying at the Senate hearing. When asked, he focused on how Hensarling’s legislation would rethink the FSOC’s role. “I would be concerned with eliminating Title II in its entirety,” he said. “It has enhanced our ability to resolve large, systemically important institutions. Other parts, however, of what he wants to do with the FSOC, [limiting its] authority to regulate products and services, might be a better approach to dealing with things than designating a few SIFIs.”
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