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Republicans Unveil Plan to Revamp Dodd-Frank

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“We believe that we need a banking system that has a federal safety net that has a whole lot more capital and a whole lot less federal control,” the Republican chairman of the House Financial Services Committee said.CreditCredit...CNBC

WASHINGTON — The Republican chairman of the House Financial Services Committee outlined on Tuesday a legislative proposal that aims to dismantle significant portions of the Dodd-Frank financial regulatory overhaul.

The plan, whose details will be released in full later this month, has little chance of passing Congress this year. But the proposal by Representative Jeb Hensarling, Republican of Texas, may influence the presidential debate and help shape the Republican agenda in the next term.

The conservative lawmaker has been a longtime critic of the financial reform law. The Financial Choice Act, which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs, builds on longstanding efforts by House Republicans to roll back or repeal major elements of the law, and would strip financial regulators of significant authority to oversee some of the country’s largest financial institutions. The plan is an outgrowth of a call by House Speaker Paul Ryan for Republican lawmakers to offer affirmative policy proposals that go beyond criticisms of Democratic policies.

Donald J. Trump, the presumptive Republican presidential nominee, has said that he will dismantle Dodd-Frank, though he has not provided detail about how he would replace or rewrite the law.

“Simply put, Dodd-Frank has failed,” Mr. Hensarling said in remarks to the Economic Club of New York on Tuesday. “It’s time for a new legislative paradigm in banking and capital markets.”

His proposals will call for replacing the financial reform law’s “orderly liquidation authority” for winding down a failing financial institution with a new chapter of the bankruptcy code.

The plan would also repeal the Volcker Rule, which aims to stop banks from making some risky bets with their own money. Moreover, the legislation would prevent a body of regulators known as the Financial Stability Oversight Council from designating any nonbanks as “systemically important.” MetLife recently won a federal court case to throw out its “too big to fail” label from the F.S.O.C., but other companies, including the American International Group and Prudential Financial, are still covered. General Electric’s financial unit has applied to have the designation removed.

At the same time, the proposal would allow the country’s largest banks to exempt themselves from capital and liquidity requirements and other regulatory standards if they hold enough capital to maintain a leverage ratio of 10 percent.

“The Republican plan does not ‘force’ any bank to raise a dime of new capital,” Mr. Hensarling said . “Rather, it allows banks to opt into a regime that replaces Dodd-Frank’s suffocating regulatory complexity and control with market discipline.”

The legislation would also restructure the Consumer Financial Protection Bureau and remove some of its powers. The plan would replace the agency’s single director with a bipartisan commission, which would be called the “Consumer Financial Opportunity Commission.” All of the financial regulatory agencies would have to abide by heightened cost-benefit analysis standards that critics have argued are designed to slow or even halt the rule-writing process. The other financial agencies would also be reformed as bipartisan commissions, in cases where they are not already, and all would be subject to the congressional appropriations process, except in the case of the Federal Reserve’s monetary policy.

Still, the conservative plan does contain some elements that others may find more palatable. The legislative outline calls for imposing stronger penalties for financial fraud and for greater transparency in the enforcement process, which policy makers on both sides of the aisle have advocated since the financial crisis, albeit with little to show so far. It also gives a nod to community banks, teeing up provisions that would loosen standards for smaller financial institutions. But even some of those proposals have faced resistance from Democrats in Congress.

President Obama, in a recent speech on the economy, reiterated the White House’s stance against broad rollbacks of the financial reform law, underscoring the uphill battle the legislation would face in the current political environment.

“Have we really forgotten what just happened eight years ago? It hasn’t been that long ago,” Mr. Obama said last week in Elkhart, Ind., referring to big banks. “And because of their reckless behavior, you got hurt. And the notion that you would vote for anybody who would now allow them to go back to doing the same stuff that almost broke our economy’s back makes no sense.”

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