The House will vote tomorrow on H.R. 6392, the “Systematic Risk Designation Improvement Risk of 2016,” a bill to repeal Title I of the Dodd-Frank Act, thereby removing over $4 trillion in bank assets from heightened Fed supervisory scrutiny. The bill, while unlikely to pass this Congress, is a harbinger of efforts and arguments and eventually legislation to “dismantle” promised by president-elect Trump.
In the day’s big news, Trump announced his intention to name Steve Mnuchin Treasury Secretary, the man who would be charged with this dismantlement. This nomination sets up the longtime Wall Street insider and longtime favorite for the position, as one of Trump’s top economic advisors — an appointment apparently at odds with Trump’s campaign promises to fight the influence of Wall Street. We’ll cover that nomination in greater depth tomorrow.
H.R. 6392 — Main Provision
H.R. 6392, the “Systematic Risk Designation Improvement Risk of 2016,” would repeal the central features of Title 1 of Dodd-Frank, reducing the regulating power of the Federal Reserve.
The bill would in particular make three major changes to Dodd-Frank (DFA):
- Strip the Fed’s authority under Title 1 to place scaled regulations on banks with greater than $50 billion in consolidated assets, but are not among the eight largest, global systematically important banks, which face still greater regulatory requirements.
- Require the FSOC to designate banks “systemically significant” for DFA purposes individually, barring multiple designations at one time by the FSOC, inherently slowing the process.
- Require the FSOC to base regulatory decisions on what is mandated for a given bank using the standards outlined by the Basel Committee, an unaccountable international regulator.
Criticisms of H.R. 6392
The legislation has drawn extensive criticism from various corners for its vast relaxation of the chief systemic protections afforded by DFA. The Center for American Progress has decried the bill as demonstrating a “breathtaking degree of historical amnesia.” Indeed, the bill would prevent the Fed from imposing vitally important stress tests, liquidity rules and living wills, and other necessary regulations on all but eight banks.
- The Regional Banking Sector
The over two dozen regional banks governed by the bill together hold over $4 trillion dollars in total consolidated asset. Over sixty percent of deposits in the state of Ohio and over half of deposits in the state of Pennsylvania are held by large regional banks deregulated by under this legislation. Many of these firms were at the heart of the 2008 financial crisis. In 2008, large regional banks were among the leading dealers in predatory subprime and Alt-A mortgages, and subprime mortgage-backed securities.
Because of their lack of capital, the regional were among the first institutions to undergo sudden collapse, spreading panic which worsened the crisis. Large regional banks in fact received twice as much money as a ratio to assets under TARP than all of the banks with assets below $50 billion.
H.R. 6392 would also increase the red tape and administrative backlogs surrounding banking regulation.
Another sharp critique of the bill is that it makes US regulation subservient to unaccountable foreign regulating bodies. H.R. 6392 cedes to foreign regulators an unprecedented veto power over whether the U.S. regulators can apply appropriate risk controls at some major banks. The proposal declares that risk measurement approach of the Basel Committee on Banking Supervision shall be used, as opposed to US-developed approaches. Regulation designed by international banks may not be appropriate for large regional U.S. banks. The Basel Committee is an international regulatory body that has no over sight, and no accountability to the US government or the American people.
The metrics outlined by the Basel Committee are also wholly inappropriate for the type of bank that they would be addressing, as these metrics were written with large, international banks in mind, not large regional banks. This would essentially render US regulators subordinate to international law makers that make their decisions independent of, and with little regard to the situation in the United States.
Harbinger of 2017
While it is unlikely that H.R. 6392 will make it onto the Senate floor this year, this bill is still a major threat to prudent regulation and the maintenance of the Post-2008 system. It represents an opening salvo in the GOP promise to dismantle Dodd-Frank. The bill removes measures in DFA Title I could well have prevented the worst depredations of the financial crisis and could prevent another crisis. It deregulates the very banks that played a such large role in creating the crisis and could result in exposing the market to more systematic risk than we have seen since before the crash.
This bill is the first in what can be expected as many attacks against regulation that industry has adapted to and is generally in compliance with, incurring large sunk costs.
How the House votes on this bill tomorrow — particularly the Democrats, who split in House Financial Services (opposing it 18-8) — might be predictive of its chances of passing the Senate in the next Congress.