DFA vs. the CHOICE Act (Nov. 17)

Mike & Co.,

The mandate that President-elect Trump claims he has on banking regulations is to “dismantle” the Dodd-Frank Act.  Whether this is a credible threat, hyperbole, or something in-between depends entirely on what the new administration sends Congress.

But we have baseline legislation comprised of significant Dodd-Frank revisions that already have the support of the House GOP leadership and most of the conference rank-and-file.  The comprehensive revisions in Financial Services Chair Jeb Hensarling’s CHOICE Act, adopted by the House earlier this year, therefore deserves a look.




GOP Talking Points

In an op-ed in today’s Wall Street Journal, Peter Wallison’s, financial policy scholar at the American Enterprise institute, provides a cheat sheet outlining  provisions of Dodd-Frank that Republicans keenest to repeal.

For example, the Volcker Rule should be repealed, or delayed since there is no reason to believe that security trading facilitated the crisis. The rule merely restricts free trade of assets and liabilities. This claim is legitimized because the Treasury Department is investigating the issue, and whether the impending rule is causing a shortage of liquidity in debt markets.

The overarching theme and theory of the case for Hensarling’s bill is that regulations, which sometime number in the thousands of pages, impose high fixed costs on small banks who must choose to either hire compliance managers (decreasing their lending capacity) or merge with larger financial institutions that can absorb those costs at a cheaper marginal cost on their behalf.  The result has been that banks are not the most popular mortgage suppliers as independent mortgage lenders gain market share.

Hensarling’s CHOICE Act

House Financial Services Committee Chairman Jeb Hensarling is expected to lead negotiations for congressional Republicans in dismantling Dodd-Frank, and he will use his CHOICE Act as his point of reference. That is, if Trump does not pick him for Treasury Secretary, an appointment the Texas laissez-faire proponent does not expect. The bill is opposed by President Obama, Janet Yellen, and every Democratic member of Hensarling’s committee. Among the key provisions in the bill:

  • TBTF:  Exemptions from SIFI rules

If financial institutions deemed systematically important increase their capital holdings (to 10% of assets), they can replace complex Basel risk-based capital rules with a simpler asset-based leverage ratio.

  •  CFPB: Governance/Funding Changes

Would replace the CFPB administrator with a five person, bipartisan commission and put the Bureau under the standard appropriation process.  An appellate court in October called the bureau ‘unconstitutionally structured’ because the president can’t replace its executive director except for malfeasance, and its funds come from the Federal Reserve instead of congressional appropriations.

  •  Community Banks:  Regulatory Relief

Many of the small, arcane rules in Dodd-Frank were only meant to apply to large banks, but they have stiffed smaller banks, a point Democrats concede was overlooked. Community banks and credit unions hold $3.9 in assets, and encouraging the growth of these institutions with local knowledge is important.

  •  Volcker Rule Repeal

Speculative investments with taxpayer protected bank deposits would once again be permitted, potentially putting the American public on the hook should another crisis arise.

  • Shadow Banking:  Eliminate Oversight

Mutual funds, hedge funds, insurers, and private equity firms largely were able to sidestep Dodd Frank oversight, and Hensarling’s proposal would ensure that these types of institutions were protected from the rules.

  • DOL Fiduciary Rule: Eliminate 

Includes Rep. Wagner’s Retail Investor Protection Act, which prevents the Labor Department from implementing its controversial fiduciary rule by forcing the it to halt the rule until the SEC drafts a fiduciary law of its own. This would essentially halt the controversial rule, and allow Republicans more time to eliminate or defang it.

Pre-Positioning and Defense Strategy 

During negotiations, Democrats may be advised to push Hensarling further in some areas for stricter regulation and enforcement while seeking to eliminate certain of his bill’s less felicitous provisions.  If the capital requirement exemption from SIFI looks like it will be in the bill, Democrats may seek to push it up to 15 or 20 percent.  Similarly, Democrats could seek to increase both the quantity and scope of the penalties the SEC is allowed to authorize.

Democrats also may benefit from certain structural changes.  Given the recent appeals court ruling, the CFPB may be forced to restructure one way or the other.  Installing two Democrats on the commission would give them a greater, since a Republican were to head the bureau.  Democrats may join with Hensarling on small bank deregulation, if it can mean keeping tight regulations on Wall Street, supporting small business owners and innovators who want to see increased access to local credit and carry outsized political away in every Congressional district in the country.

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