Update 173: Hensarling Aims at DFA
New Bill Expands Reach of CHOICE Act
Yesterday, Jeb Hensarling, Chair of House Financial Services, announced that he had beefed up his Financial CHOICE Act to eliminate not only key Dodd-Frank, but also Sarbanes-Oxley, even JOBS Act regulations. Hensarling 2.0 proposes major structural changes to the CFPB and the SEC.
The announcement included a self-imposed deadline for introduction of the revamped legislation, with the Committee Chair committing to getting Hensarling 2.0 (H2O) to his House colleagues his plan by the end of the month.
Is this timetable bankable? Does it even matter if H20 is not Senate Bankable, meaning Senate Banking Committee would never report the bill to the full Senate? We look below.
The Major Changes
Among the major DFA-related provisions in Hensarling’s new bill are those:
• weakening of provisions protecting against systemic risk, increasing the threat of “too big to fail” financial institutions, holding up taxpayers for another bailout
• rolling back safeguards protecting ordinary investors and consumers on financial transactions involving everything from derivatives trading to retail banking
• repealing restrictions on the kind of subprime mortgages that caused the 2008 financial crisis
Hensarling Needs Votes
Hensarling believes that his Financial CHOICE approach should replace Dodd-Frank entirely. But even if only reforms DFA and were somehow to pass in present form, it would thoroughly undermine the 2010 financial regulation law. The skeleton will still exist, and the new bill would act as a disable-and-disregard “remedy” to Dodd-Frank.
With that in mind, the bill will most probably not make it to the floor until the summertime, per Rep. Patrick McHenry, vice chair of House Financial Services. Although passing the Senate would require a Herculean legislative effort to create a bipartisan measure, some Republicans are still looking for ways to roll back Dodd-Frank while avoiding working with Democrats. GOP Senator Pat Toomey suggested last week that the reconciliation process to repeal regulations on a simple majority vote basis is still available.
The Role of Capital Requirements
What is interesting is the Republican interest in capital regimes, which monetize regulations. Another way of looking at these is effectively as a corporate tax. So instead of ducking a regulation by imposing a corporate tax, the GOP could weigh that out during their tax reform efforts as a means to compromise with Democrats.
Hensarling’s new plan also includes reducing the frequency of bank stress tests performed by the Federal Reserve (once every two years as opposed to annually). The plan would also give the president the authority to fire the directors of the CFPB and restrict its oversight, as well as changing the code of conduct between the SEC and private companies.
Republican Strategy vs. Street Sense
Seeking to learn from the health care reform failure, the Congressional leadership may be of the view that H2O provides a strongly conservative approach to repealing and replacing Dodd-Frank, bridging the gap in the GOP between the Freedom Caucus and House leadership. It’s hard to see it get even through the House without compromise, though. All the while, Dodd-Frank has quietly been picking up support in the last couple of months from the banks and their main news source: the Wall Street Journal (featuring masthead editorials opposing repeal of DFA).
With some banks backing key portions of the 2010 law, such as the need to preserve the FSOC and the Orderly Liquidation Authority from Titles I and II, the bill’s road to the President’s desk will not be an easy one. If it passes the House, the Senate will almost certainly reject it.
From health care reform to tax overhaul to regulatory relief, the Trump administration will have to come to terms with the likelihood that this might just prove to be too legislatively infeasible a task.