House Republicans are working on an effort to replace President Obama’s financial reform six years after it was signed into law.
This is a new tactic for the GOP. Congressional Republicans have introduced legislation undoing parts of the law or changing some of its regulations, and even gotten some of those bills signed into law.
But although they have harshly criticized the 2010 Dodd-Frank financial reform law, blaming it for slowing lending, overburdening small banks, and enshrining the phenomenon of “too big to fail,” they have not outlined how they would replace it and prevent the damaging crises and bailouts that spurred Congress to pass the law in the first place.
Following House Speaker Paul Ryan’s request for Republicans to pass legislation showing how the GOP would govern if they won the presidency, however, Republicans on the House Financial Services Committee are working on a broad plan for reforming the financial sector.
In a speech this month in Washington, committee Chairman Jeb Hensarling, R-Texas, outlined some of the main planks of the plan. He also issued a stark promise to undo Dodd-Frank, saying that “on behalf of every hardworking, struggling American — I will not rest until Dodd-Frank is ripped out by its roots and tossed on the trash heap of history.”
The committee hasn’t given a timeline for when the reform plan might be introduced. When it does come out, here are what top analysts will be looking for:
How much capital would banks need?
Republicans generally disagree with the new rules Dodd-Frank places on banks and the new powers it gives to regulators to supervise financial firms.
In his speech, Hensarling suggested that banks might be given a way out: They can opt out of many of the rules if they choose to have significantly higher capital levels.
Higher capital means that banks fund their lending and operations less with borrowing and more with ownership stakes. Many experts think that higher capital means safer banks, because those banks can lose more money without facing the prospect of defaulting on the debt they owe their creditors. Furthermore, having more investors with an equity stake in the company means that those investors might be more diligent about ensuring that the bank isn’t taking unwarranted risks.
The question, however, is just what level of capital would be required. Higher capital will be opposed by banks, because it can limit their ability to make profitable loans and because they have already ramped up their capital in the wake of the crisis, thanks to new rules.
Today, the eight biggest banks have an average of 6 percent capital to total assets. Bipartisan legislation introduced last Congress by Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., would have set that at 15 percent. One top regulator has suggested that banks might get regulatory relief if they had capital of 10 percent to 20 percent.
“I think you need to get close to at least 15 percent,” said Mark Calabria, director of financial regulation studies at the Cato Institute and a former congressional GOP staffer who has testified before the committee. “You need more skin in the game. These institutions are too highly leveraged.”
What relief would be offered?
Any banks that have a “fortress balance sheet” with high levels of capital would earn regulatory relief, Hensarling suggested. In particular, they would be freed from Dodd-Frank rules and the Basel III capital rules, which are internationally agreed upon regulations that require certain amounts of capital depending on the riskiness of the assets held by the bank.
The question is whether the relief would go beyond the new Dodd-Frank rules, to rolling back long-standing powers that the regulators have had over banks. For banks to take the deal with higher capital, said Calabria, “the relief needs to be substantial,” not just a Dodd-Frank opt-out.
“Is it just rules related to Dodd-Frank, or is it things outside of Dodd-Frank?” asked James Ballentine, the executive vice president of congressional relations and political affairs for the American Bankers Association, noting that “capital is king” for many of his associations’ members.
What would happen to the consumer protection bureau?
It’s not hard to guess what Democrats’ biggest fear is: That Republicans try to get rid of the new Consumer Financial Protection Bureau entirely.
Although Hensarling did not directly mention ending the bureau in his speech, his Democratic counterpart, Rep. Maxine Waters of California, immediately accused him of trying to “punish consumers by eliminating the agency designed specifically to protect them.”
Many Republicans have expressed support for eliminating the bureau or at least significantly curbing its powers to regulate consumer products such as mortgages, credit cards and payday loans.
In the past, however, the GOP has advanced legislation reforming the bureau by replacing its single director with a bipartisan commission.
“High up on the hit list is the structure for the CFPB,” said James Angel, a Georgetown University finance professor who has testified before the committee. Or Republicans could look to make the bureau’s funding subject to congressional appropriation. Today, it is funded by the Federal Reserve, a situation “that in itself is extraordinary,” angel said.
How much would it tie regulators’ hands?
Conservative Republicans argue that regulators have made the situation worse by restricting access to credit and by making bailouts more likely.
They could act on those beliefs by further limiting regulators’ abilities to offer emergency support to banks and other financial firms, for instance by curbing the new authority Dodd-Frank gives to the Federal Reserve to extend emergency loans or reducing the level of deposits the Federal Deposit Insurance Corporation guarantees.
Regulators in office during the crisis, such as former Fed Chairman Ben Bernanke and former Treasury Secretary Tim Geithner, have defended the powers given to regulators, saying they are necessary tools for addressing panics and preventing worse effects on the economy. Some conservatives, however, as well as liberals, have said the power to rescue firms incentivizes risky, dangerous behavior in the first place.
Dodd-Frank created a super-group of all the top financial regulators that allows them to identify risks anywhere in the financial system and subject firms to stricter supervision if necessary. Republicans have slammed the Financial Stability Oversight Council as non-transparent and unacccountable.
“They shouldn’t have that power, they could abuse it, and it is not worthwhile in the first place,” said Peter Wallison, a financial expert at the American Enterprise Institute conservative think tank who has consulted with members of the committee. Wallison argued that the council spreads the phenomenon of too-big-to-fail by creating the impression that some non-banks would receive government support if they failed. “Maybe the FSOC could continue remain as a consultative body in which the regulators get together from time to time and talk about what’s happening in the regulatory world,” he suggested.
What about Fannie and Freddie?
Fannie Mae and Freddie Mac were among the financial firms that got a government lifeline in fall 2008. Unlike the banks that got bailouts, however, the two mortgage giants were untouched by Dodd-Frank and still remain in the government’s custody.
“Dealing with our mortgage finance system has to be a very large part of this,” Calabria said.
In 2013, Hensarling’s committee advanced legislation that would have eventually shuttered Fannie and Freddie. It would have replaced the guarantees they offer on mortgage-backed securities with a regulated private system of finance.
The bill was never taken up in the full House amid a lack of interest from other lawmakers and opposition from the White House. But many Republicans view the government-sponsored enterprises as the unfinished business of financial reform.
