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Dodd-Frank

Republicans say more than ‘no’ on bank rules

Darrell Delamaide
Special for USA TODAY

WASHINGTON — There are two sides to every story and House Republicans have now presented their alternative to Dodd-Frank, describing the 2010 financial reform as “failed” legislation based upon “faulty principle, faulty premise and faulty policy.”

Even as Donald Trump, the presumptive Republican nominee for president, continues to generate controversy and concern about his party’s prospects in this fall’s election, Rep. Jeb Hensarling of Texas, chairman of the House Financial Services Committee, unveiled a revision of Dodd-Frank that would require Republican control of Congress and the White House to pass.

U.S. Rep. Jeb Hensarling, R-Texas, chairs the House Financial Services Committee.

In a speech last week, Hensarling said none of Dodd-Frank’s goals — financial stability, ending too big to fail, and lifting the economy — have been realized.

“Today the big banks are bigger and the small banks are fewer,” he told an audience at the Economic Club of New York. “In other words, 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 went so far as to evoke everybody’s new favorite Founding Father, Alexander Hamilton, to bolster his argument for limiting the role of government, citing the Federalist Papers to the effect that human nature is not “universal venality” and doesn’t need intervention by an unlimited government to control its every impulse.

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For his part, Trump has pledged to roll back Dodd-Frank — a 2,000-page law mandating hundreds of specific regulations — and to alleviate the burden of government regulation on business in general.

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This is, of course, classic Republican policy and demonstrates that Trump is more in sync with the party than the maverick aspects of his campaign might indicate. Hensarling was among the nine House committee chairmen who endorsed Trump last month, saying he gives the party the best chance of holding its congressional majorities.

The goals of the proposed Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act, as described by Hensarling, are transparent capital markets, the chance for each individual to achieve financial independence, protecting consumers from fraud while preserving their choices, ending too big to fail and taxpayer bailouts, and replacing with simple rules a complex regulatory apparatus that can be gamed.

Part of that simplicity is to offer banks the option of raising their capital ratio to 10% in exchange for being freed from the Dodd-Frank regulatory regime.

“Think of it as a market-based, equity-financed Dodd-Frank off-ramp,” Hensarling said.

Large banks would have to raise significant amounts of new equity capital to meet this ratio, while most community banks, already highly capitalized, would generally not need to raise more.

Higher capital requirements have in fact been a key element of reforms pushed by the Federal Reserve and other bank regulators, urged on by vocal academic critics such as Simon Johnson of MIT and Anat Admati of Stanford.

To take care of “too big to fail,” Hensarling proposes “bankruptcy, not bailouts.” Rather than rely on Dodd-Frank’s vague and untested “orderly liquidation authority” giving regulators wide discretion in winding down a bank — including use of government funds if necessary — the new bill incorporates previously passed legislation to create a subchapter of the bankruptcy code for complex financial institutions.

This change, Hensarling argues, would ensure an impartial process in the judicial system, provide stakeholders with clear expectations based on settled legal precedent, and would not involve any bailout as part of the liquidation or reorganization.

A third major prong of Hensarling’s legislation would be to make the new Consumer Financial Protection Bureau more accountable by making it more like other regulatory agencies.

The bureau created by Dodd-Frank at the behest of Elizabeth Warren, who headed the congressional oversight of the bailout program before becoming a senator from Massachusetts, is sui generis in that it is headed by a single director endowed with considerable discretion and relatively free from oversight.

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The new bill would install a five-member commission on the model of the Securities and Exchange Commission and other regulatory agencies, with the concomitant bipartisan allocation of those seats.

The Republican proposal has a profusion of other details — from making it harder to formulate new regulations (by adding a cost-benefit analysis and requiring final approval by Congress) to eliminating the Volcker Rule banning banks from speculative trading.

Republicans have been making noises about repealing Dodd-Frank since it was passed. Hensarling himself held some spurious hearings last year that were patently ideological in nature with the star witness being the unreconstructed former Texas senator, Phil Gramm, who championed deregulation in the 1990s.

The difference this time is that the new legislation does not repeal Dodd-Frank so much as replace it with alternative measures that the Republicans argue will be more effective than the reform legislation has proven to be.

Far from being a “wet kiss” for Wall Street, as Warren has suggested, the new legislation, the Republican committee countered, actually faces opposition from the banks, as reported by the New York Times last month.

It is certainly the most serious effort yet by the Republicans to go beyond being the party of “No” in this important policy sector.

Even if the stars don’t align for Republican control of government, the new proposals are in part at least a constructive effort to spotlight Dodd-Frank’s flaws and show the way to improve it.

Columnist Darrell Delamaide — @ddelamaide on Twitter — has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News, among others.

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