Megabanks would get the ability to opt out the 2010 Dodd-Frank financial reform law’s rules if they raise “several hundred billion dollars” in capital under the Republican alternative to be introduced Tuesday by Republican congressman Jeb Hensarling.
Hensarling, the Texan chairman of the House Financial Services Committee, will unveil a GOP’s alternative to the Obama law Tuesday in New York City that features an option for banks to avoid many regulations if they maintain capital levels of 10 percent.
Most community banks already clear that mark. But the eight biggest U.S. banks would have to roughly double their capital levels to meet it. Megabanks like JPMorgan Chase, Goldman Sachs, and Bank of America have an average capital ratio of 5.73 percent based on a similar measure.
The difference amounts to the hundreds of billions of dollars, according to the text of a speech prepared for Hensarling. But the banks would not be required to raise the money: “Banks will opt into the Republican plan’s new regime only if it makes them more competitive,” Hensarling will say.
The 10 percent “leverage ratio,” a broad, inflexible measure of capital, would still be far short of the level recommended by some proponents of higher capital requirements. A bill introduced last Congress by Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., would have set a 15 percent ratio. Alan Greenspan, the former Federal Reserve chairman, has floated a target of 20 percent or more.
Many analysts see higher capital as a way to prevent bank failures and bailouts. Higher capital requirements effectively mean that banks must fund their businesses more with ownership stakes and less on loans. With higher capital, banks can pass greater losses onto shareholders without defaulting on a loan, a prospect that can generate panic. Greater ownership, in theory, also incentivizes bank shareholders to more closely monitor risks taken by executives.
The higher capital level option is a mainstay of the GOP plan to replace Dodd-Frank while addressing the underlying problem that the law was passed to prevent: That of too-big-to-fail banks, crises and bailouts.
Not only has Dodd-Frank failed to eliminated the threat of taxpayer bailouts for failing banks, Hensarling argues, but it has also slowed economic growth through over-regulation and also “made us less free.”
In addition to offering banks regulatory relief if they maintain higher capital levels, the GOP plan will also roll back other Dodd-Frank measures.
Hensarling has already sketched out some of the provisions included in the bill, the text of which has yet to be released.
He will add more detail Tuesday. Of note, the bill will include the sweeping Federal Reserve reform legislation authored by Rep. Bill Huizenga, R-Mich., that would reshape the central bank’s conduct of monetary policy in addition to its regulation of banks.
One thing the Hensarling-backed legislation wouldn’t do is shutter the mortgage giants Fannie Mae and and Freddie Mac and scale back the government’s involvement in the housing finance system. Republicans have blamed those two government-sponsored enterprises, now in the government’s custody, for playing a role in the subprime mortgage crisis, and faulted Dodd-Frank for not reforming them.
The House Dodd-Frank alternative also will not change the threshold at which banks are subject to more regulation under current law. That threshold, $50 billion in assets, has been the target of lobbying efforts by the industry and would have been lifted by reform legislation advanced last year by GOP Senate Banking Committee chairman Richard Shelby.
