On June 9, 2017, the US House of Representatives approved a bill that would repeal key parts of the Dodd-Frank legislation which was passed in the wake of the 2008 financial crisis.1 The House voted 233 – 186 to approve the Financial CHOICE Act, which would give banks a choice between complying with Dodd-Frank or holding onto more capital. The legislation, which faces major hurdles in the Senate because of expected Democratic opposition, would continue the Republicans’ deregulatory push under President Trump.2 The President said during the campaign that his goal was to dismantle Dodd-Frank, and in February directed Treasury Secretary Steve Mnuchin to consult with regulators about changes to the law and report back by this month.3 House Republicans decided however to go ahead with a revised version of legislation introduced in 2016 by Representative Hensarling, the Chairman of the House Financial Services Committee, and not to wait for the Treasury Secretary’s report.4 

What This Means

The key principles of the CHOICE Act are:5

  • Taxpayer bailouts of financial institutions must end and no company can remain “too big to fail”
  • Both Wall Street and Washington must be accountable
  • Simplicity must replace complexity
  • Economic growth must be revitalized
  • Every American must be able to achieve financial independence 

On Wall Street, this will, among other things, take aim at Title II of Dodd-Frank, which created an Orderly Liquidation Authority (OLA) designed to wind down failing financial institutions, repeal the Volcker Rule, which limits proprietary trading by banks, and eliminating the Financial Stability Oversight Council (FSOC) which determines the designation of Systemically Important Financial Institutions (SIFIs). The CHOICE Act will also seek to dramatically reduce stress test requirements, giving regulatory relief to medium sized banks with assets of $50 billion, and possibly make these tests bi-annual.6

The CHOICE Act passed by the House would significantly change the funding of the Consumer Financial Protection Bureau (CFPB) currently funded by the Federal Reserve, moving the funding and supervision to Congress, and allowing the President to fire the head of the agency.7 The bill also seeks to repeal the Department of Labor Fiduciary Rule, which requires investment brokers who handle retirement funds to put their clients’ interests ahead of their own compensation, company profits and other factors.8

Another key feature of the CHOICE Act is the ability for any bank to avoid Federal Regulatory oversight if it holds capital of 10% of assets, as opposed to the current requirement of 3/6%. However, the big banks are critical of such a high capital requirement, and have not embraced the legislation.9

Conclusion

Democrats oppose the dismantling of Dodd-Frank, and particularly the weakening of the role of the CFPB, and the repeal of the Volcker Rule, so setting up a potential battle in the Senate. However some elements of the bill do have bi-partisan support, which provides a way forward for some, but likely not all of the Financial Choice Act.10

References

  1. “House Votes to Roll Back Parts of Dodd-Frank Financial Industry Reform Bill,” NBC News, June 8, 2017. Access at: http://www.nbcnews.com/news/us-news/amp/house-votes-roll-back-parts-dodd-frank-reform-bill-n770076.
  2. “House Votes to Roll Back Parts of Dodd-Frank Financial Industry Reform Bill,” NBC News, June 8, 2017. Access at: http://www.nbcnews.com/news/us-news/amp/house-votes-roll-back-parts-dodd-frank-reform-bill-n770076. “House votes along party lines to repeal key Dodd-Frank financial reforms,” Los Angeles Times, June 8, 2017. Access at: http://www.latimes.com/business/la-fi-dodd-frank-repeal-20170608-story,amp.html.
  3. “House votes along party lines to repeal key Dodd-Frank financial reforms,” Los Angeles Times, June 8, 2017. Access at: http://www.latimes.com/business/la-fi-dodd-frank-repeal-20170608-story,amp.html.
  4. Ibid
  5. “Here Are All The Financial Reforms That Will Disappear With Dodd-Frank,” Forbes, June 9, 2017. Access at: https://www.forbes.com/sites/antoinegara/2017/06/09/here-are-all-the-financial-reforms-that-will-disappear-with-dodd-frank/amp.
  6. Ibid
  7. “House Votes to Roll Back Parts of Dodd-Frank Financial Industry Reform Bill,” NBC News, June 8, 2017. Access at: http://www.nbcnews.com/news/us-news/amp/house-votes-roll-back-parts-dodd-frank-reform-bill-n770076.
  8. “House votes along party lines to repeal key Dodd-Frank financial reforms,” Los Angeles Times, June 8, 2017. Access at: http://www.latimes.com/business/la-fi-dodd-frank-repeal-20170608-story,amp.html.  
  9. Ibid
  10. “The Financial Choice Act Doesn’t Repeal Dodd-Frank, but It’s Still a Big Deal,” Reason.com, June 8, 2017. Access at: http://reason.com/blog/2017/06/08/the-financial-choice-act-doesnt-repeal-d/amp.

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